K 6 ... V' 7 ^*.^ ... ^ 






r < 



^ 















-•' «r ^ •• 

A 



++& 



^0 









•1 o 



»°*i 



» ' • «* o 

























^0* 



0° .'^1. °o ,** . 




.0 



.0^ % 



^*^ ***** :m£K* **»c& :£mk'* *< 




4o ,^ 







Digitized by the Internet Archive 
in 2010 with funding from 
The Library of Congress 



http://www.archive.org/details/rentinmoderneconOOjohn 



PUBLICATIONS 



OF THE 



AMERICAN 



Economic Association 



THIRD SERIES, VOLUME III 



PUBLISHED FOR THE 

AMERICAN ECONOMIC ASSOCIATION 

BY THE MACMIIXAN COMPANY 

NEW YORK 

LONDON : SWAN SONNENSCHEIN & CO. 

1902 



CONTENTS OF VOLUME THREE, THIRD SERIES. 



y 



NUMBER. PAGES. 

i. Papers and Proceedings of the Fourteenth An- 
nual Meeting, Washington, D. C, December 
27-30, 1901 1-400 

2. The Negro in Africa and America. By Joseph 

Alexander Tillinghast 401-638 

3. A History of Taxation in New Hampshire. By 

Maurice Henry Robinson 639-872 

4. Rent in Modern Economic Theory. By Alvin Saun- 

ders Johnson 873-1007 



INDEX OF AUTHORS MENTIONED. 



Buchanan, 63. 
Cantillon, 5. 
Carey, 85. 
Carver, 63. 

Clark, 16, 19, 32, 34, 35, 40, 41, 61, 
62, 64, 69, 70, 73, 77, 88, 91, 95, 

113- 

Commons, 24. 

Ely, 105. 

Fetter, 25, 35, 90, 91. 

George, 47, 56. 

Gross, 113. 

Hawley, 112. 

Held, 19. 

Hobson, 13, 62, 70, 77, 87, 88, 91. 

Jevons, 86. 

I,eroy-Beaulieu, 112. 

Loria, 60, 73. 

Macfarlane, 66, 103. 

Macvane, 113. 

Mai thus, 5, 103. 

Mangoldt, 112. 



Marshall, 24, 33, 34, 87. 

Mill, 86. 

Nicholson, 38, 52. 

Patten, 9, 19, 20, 35, 49, 71, 85, 86, 

92, 100, 105, 106, 109, no, 118, 

123. 
Quesnay, 4. 
Read, in. 

Ricardo, 62, 63, 74, 78, 84. 
Roscher, 63. 
Say, 22, 23, 33. 
Senior, 22, 102, 103. 
Sidgwick, 26, 29. 
Sismondi, 62. 
Smith, 21, 22, 25, 47, 55, 56, 58, 

102, 103. 
von Thiinen, 56, 74, 79, 112. 
Turgot, 5. 

Walker, 66, 70, 71, 84, 112, 119. 
Wieser, 60. 
Willett, 112, 114, 116. 






Publications 

OF THE 

American Economic Association 



THIRD SERIES. ISSUED QUARTERLY. 

Vol. Ill, No. 4. Price, $4.00 per Year. 



RENT 



IN 



MODERN ECONOMIC THEORY: 



AN ESSAY IN DISTRIBUTION. 



ALVIN SAUNDERS JOHNSON, A.M. 



NOVEMBER, 1902. 



published for the 

American Economic Association 

by the macmillan company, 

NEW YORK. 
LONDON : SWAN SONNENSCHEIN & CO. 



Entered as Second Class Matter at the New York, N. Y., Post Office, May 13, 1900. 



PRICE, IN PAPER, $.75. 



AMERICAN ECONOMIC ASSOCIATION 

Organized at Saratoga, September 9, 1885 



OFFICERS 

ident 

Edwin R. A. Seligman, Ph.D. 

Ex-Presidents 

♦Francis A. Walker, LL.D. 
♦Charles F. Dunbar, LL.D. 

John B. Clark, LL.D. 

Henry C. Adams, LL.D. 

Arthur T. Hadley, LL.D. 

Richard T. Ely, LL.D. 

/ Ice-Presidents 

Theodore Marburg 
Fred M. Taylor, Ph.D. 
John C. Schwab, Ph.D. 

Secretary and Treasurer 
Frank A. Fetter, Ph.D. 

Cornell University, Ithaca, N. Y. 

Publication Committee 

Jacob H. Hollander, Ph.D., Chairman. 

mas N. Carver, Ph.D. 
Davis R. Dewey, Ph.D. 
Willard C. Fisher, A.B. 
William A. ScoTT, Ph.D. 
1 M. Taylor, Ph.D. 

* Deceased. 

Inquiries and other communications regarding member- 
ship, subscriptions, meetings, and the general affairs of the 
Association, should be addressed to the Secretary of the 
American Economic Association, Cornell University, 
Ithaca, New York. 

Orders for publications should be addressed to The 
Macmillan Co., 66 Fifth Avenue, N. Y. City. 



Publications 

OF THE 

American Economic Association 

I J! : 

THIRD SERIES. ISSUED QUARTERLY. 

Vol. Ill, No. 4. Price, $4.00 per Year. 



RENT 



IN 



MODERN ECONOMIC THEORY: 



AN ESSAY IN DISTRIBUTION. 



AL.VIN SAUNDERS JOHNSON, A.M. 



c 



J 



NOVEMBER, 1902. 



published for the 

American Economic Association 

by the macmilxan company, 

NEW YORK. 

LONDON : SWAN SONNENSCHEIN & CO 



:i. 



(Vjp *b 



.let 



THE LIBRARY OF 
CONGRESS, 

Two Copies Received 

MAR 23 1903 

Copyright Entry 

r \jvol-. t—^'cz 

CLASS & XKc. No. 
COPY B. 



Copyright, 1903, by 
American Economic Association. 



PRESS OF 

ANDRUS & CHURCH, 

ITHACA, N. Y. 



PREFACE. 



• 



It is the belief of the author of the following study 
that the essential elements of the theory of rent are 
familiar to all serious students of economics. Present 
differences in point of view are due, not to ignorance of 
these elements, but to the fact that authorities disagree 
as to the proper emphasis which should be laid upon 
the various aspects of the problem. It is believed that 
by placing the points at issue in juxtaposition, and by 
paying due regard both to self-consistency and to 
relevancy to theoretical- needs, it will be possible to 
approximate a satisfactory view of the problem. No 
attempt has been made to trace to their original sources 
the ideas discussed in the following pages. Usually 
they are the common property of whole schools ; and if 
one author has been cited rather than another, it is 
because that author seemed to be the best available rep- 
resentative of the idea in question. 

That the positive views here advanced are largely 
based upon the theories of Professor J. B. Clark will, of 
course, be obvious to every reader. Acknowledgement 
of indebtedness is further due to Professors E. R. A. 
Seligman and F. A. Fetter, who have read this study in 
manuscript and have offered many valuable suggestions 
both as to form and matter. 

Alvin S. Johnson. 

Columbia University. 



CONTENTS. 



CHAPTER I. 

The Economic Surplus I_l8 

I i. Relativity of economic analyses, i — \ 2. Surplus income, 3 — 
\ 3. The produit net, 4 — \ 4. Surplus from the point of view of his- 
torical materialism, 6 — \ 5. Surplus energy and progress, 8— § 6. Sur- 
plus of satisfaction or of utility, 9—$ 7. The dynamic surplus, 13—? 8. 
Pseudo-surplus, 15 — \ 9. Surplus as a purely economic concept, 17. 

CHAPTER II. 

Land as an Independent Factor in Production i9~45 

\ 10. Basis of early distinction between land and capital, 19 — \ 11. 
Insufficiency of the distinction based on origin of capital in labor, 21. 
— \ 12. Extension and position as the fundamental attributes of land, 
24 _§ I3 . Relation of land value to cost, 25— \ 14. Analogy between 
cost of land and cost of capital, 31— § 15. Possibility of increasing 
economic land, 33 — \ 16. Distinction between land and capital in dy- 
namic theory, 35 — \ 17. Theoretical need of distinction between land 
and capital, 40— § 18. Summary, 43. 

CHAPTER HI. 

Rent as Unearned or Exploitative Income 46-64 

\ 19. Popular view of rent as unearned income, 46 — \ 20. Tests of 
earned incomes, 48—? 21. Confusion between necessary and earned 
income, 51— \ 22. Rent a necessary income, 53—? 23. View of rent as 
exploitative return, 55—$ 24. Analysis of productivity, 57— \ 25. Rent 
regarded as an income transferred from the consumer, 62. 

CHAPTER IV. 

Rent as a Differential or Residual Income 65-83 

\ 26. Rent not due to differences in land or powers of land, 65 — 
\ 27. Dependence of differential doctrine upon the dogma that rent 
does not enter into price, 72— \ 28. Differential method of isolating 
specific product, 72 — \ 29. The "intensive" differential analysis, 75. 
—\ 30. Why the differential analysis has been applied to land alone, 
77 — \ 31. Income to monopoly factors, Si. 



vi Contents. 

CHAPTER V. 

The Relation of Rent to Price 84-101 

2 32. The classical dogma and its critics, 84—$ 33. Weakness of 
the Ricardian position, 86 — \ 34. Validity of the "intensive law of 
rent," 87 — \ 35. Relation of rent to cost, 90 — \ 36. Influence of in- 
comes upon production, 95 — \ 37. Importance of industrial mobility, 
98. 

CHAPTER VI. 

Rent, Profit, and Monopoly Return 102-121 

§ 38. Rent and monopoly return in classical economics, 102 — \ 39. 
Analysis of monopoly return, 105 — \ 40. "Profit and rent the same 
fund," 109 — §41. Nature of profit, 111 — ? 42. Reward for risk-taking 
contrasted with rent, 114 — \ 43. Relation of " pure profit" to rent, 
117 — \ 44. Income of the superior entrepreneur, 119. 

CHAPTER VII. 

Conclusion 122-128 

# 45. Restatement of point of view, 122 — # 46. Distinction between 
land and capital, 124 — \ 47. Nature of rent, 126. 

Index of Authors Mentioned 129 



CHAPTER I. 

THE ECONOMIC SURPLUS. 

Sec. i. Economic science, it has been well said, is 
not studied because of any inherent interest of its own. 
Natural curiosity may serve as a sufficient reason for the 
investigation of physical and vital laws ; interest in the 
duties and destinies of man may give to ethical and 
metaphysical studies an intrinsic value ; but divest 
economics of its bearing upon practical action or ulterior 
thought, and few would find it| worthy of attention. 
Historically, it was the need for principles of political 
action that was chiefly responsible for the creation of 
political economy as a special science ; and in the 
present day the student usually devotes his attention to 
economics because he wishes to understand the effects, 
proximate and remote, of taxation and of governmental 
control of industry, of trade unions and monopolies ; or, 
if his interests are those of the scholar rather than those 
of the practical man, because he wishes to understand 
the sociological and political effects of economic laws, 
or because he desires to throw light upon the historical 
development of society. In any case economic science 
cannot be considered a sufficient end in itself. 

It follows, accordingly, that the results of economic 
study must not merely be true, but must have a bearing 
upon practical or intellectual problems that are recog- 
nized to be of importance per se. The distinctions and 
classifications of the economist must submit to the two- 
fold test of truth and relevancy. And as the progress of 
events and of science brings new problems into the fore- 
ground, the old analyses may lose their significance, 



2 American Economic Association. [8So 

although they may remain quite true. The work of 
economic theory, therefore, is never done. Each economic 
period will demand new analyses, based upon a point of 
view which is selected by the needs of the time. 

It is the purpose of this essay to review the position of 
the rent of laud in modern theory, to consider its nature 
viewed from the standpoint of economic science of to-day, 
and to discuss its relations with other economic incomes. 
It has long been customary with economists to treat rent 
not as an income sui generis, but as one species under a 
wide genus. Rent has been classed now with one kind 
of incomes, now with another, as one characteristic or 
another has seemed to be of vital importance. Econo- 
mists have not, however, always recognized that it is with 
reference to qualities which they have themselves selected 
as relevant that they classify rent with profits or interest 
or monopoly return. Most frequently they imagine that 
their classifications are based upon the essential nature of 
the phenomena under investigation. Reflection will, 
however, show that if such a classification is possible it is 
of no importance in economics, since phenomena which 
are similar in most of their relations may be widely dis- 
similar in the relations which may properly be called 
economic. But while economic phenomena are naturally 
grouped according to characteristics which the economist 
selects, it is not true that economic analyses may be arbi- 
trary. There are certain problems at the present 
time which will be recognized to be fundamental in 
economics. It is with reference to these problems, 
as the writer conceives them, that the point of view 
of this essay has been chosen. Criticism of other 
classifications will accordingly be based not only upon 
their inherent logic, but also upon their relevancy 
to the problems of to-day. In adopting such a basis for 



88 1 ] The Economic Surplus. 3 

criticism, injustice is necessarily done to the systems of 
earlier periods, but not to their survivals in modern 
economics. 

SEC. 2. The rent of land is usually treated as a 
species of the genus " surplus income." To show that 
any form of income is a surplus has been regarded as 
equivalent to demonstrating its kinship with rent. But 
rent is a category of economic theory, while surplus in- 
come may be a category of ethics, politics or sociology, 
as well as of economics. What is surplus income from 
the point of view of ethics or sociology may not be a 
surplus from the point of view of modern economic 
theory. It is, therefore, not legitimate for the purposes 
of economic classification to group together all incomes 
that from one point of view or another may be regarded 
as surplus. The economic surplus must consist in a 
part of the social income which exerts upon the central 
phenomena of economic science an influence differing 
from that of the incomes classed as non-surplus. It 
must possess economic potency if it is not to fall outside 
of the domain of economics ; it must affect phenomena 
that are recognized as secondary, from the economic 
point of view, else the term "surplus" is a misnomer. 

The classification of the social income into surplus and 
non-surplus is as old as economic theory, although early 
writers did not usually treat it as one of fundamental im- 
portance, as do many modern writers. But there has been 
little uniformity in the determination of the concrete 
forms of income that constitute the surplus. The history 
of economic science presents a series of surplus funds no 
two of which cover identically the same elements. This 
is what one would expect, since those " funds" have 
been constructed with reference to widely different cen- 
tral problems. 



4 American Economic Association. [882 

Sec. 3. The first demand upon the resources of a 
community is the covering of the barest needs of those 
who procure from nature wealth in its raw form. If 
nothing is left after this primary need has been met, it 
is evident that highly elaborative industry, organized 
government, art, science, and other forms of cultural 
activity are practically impossible. If, however, an ex- 
cess of wealth above such primary costs remains, one of 
the most essential conditions of higher social activities 
is present. 

A surplus of this order was the produit net of the 
Physiocrats. The needs of the agricultural laborer could 
be met by a portion of the produce of the soil, while 
such wealth as exceeded the demands of agricultural 
labor could be employed for the support of trades and arts 
and government. The extent of the surplus measured a 
community's potentialities for cultural development. 

It is these primary riches, continually renewed, which support all 
the other states of the realm, which give activity to all the other pro- 
fessions, which cause commerce to flourish, which favor population, 
which animate industry, which create the prosperity of a nation. 1 

What the Physiocrats were seeking to establish was a 
material basis for the complex of phenomena that dis- 
tinguish a civilized and refined community from a bar- 
barous one. The produit net had no importance apart 
from its political and social effects. Again and again 
we are reminded that it is not really wealth until a 
population has arisen to demand it. 2 It is of no signi- 
ficance until it has transmuted itself, so to speak, into 
the activities of the artisan and trading and professional 
classes. The transformation of surplus revenue into 

'Quesnay, Grains, printed in Physiocrates, ed. E. Daire, vol. 1, p. 
272. 
2 Quesnay, Grains, p. 299. 



883] The Economic Surplus. 5 

higher social forms is explained according to the some- 
what naive common sense of the time. 

The assemblage of a number of rich proprietors who reside in a 
single place is sufficient to form what is called a city, where mer- 
chants, manufacturers, artisans, workingmen and domestics come to- 
gether in proportion to the revenues which the proprietors spend 
there. In each case, the magnitude of a city is naturally proportioned 
to the number of proprietors of lands, or rather, the produce of the 
lands which belong to them. The capital city is formed in the same 
way as a city of the provinces, with this difference, that the great pro- 
prietors of the whole state reside in the capital. 1 

Two assumptions are manifestly necessary in order to 
give definiteness and meaning to the surplus thus con- 
ceived. It is necessary to assume first, that the wages of 
labor are fixed at the minimum of subsistence ; and 
secondly, that population will automatically increase until 
the whole product of the soil is consumed by laborers 
engaged either in extractive or elaborative industry. 
Under these assumptions the produit net would be a fair 
measure of the labor force at the command of society, 
and this, in a society only slightly capitalistic, would be 
an approximate measure of its productive powers. 

In the later writings of the E^conomistes we find both 
assumptions developing : Turgot states explicitly that 
the laborer normally receives his bare living ; and 
Malthus, who in his doctrine of rent may be classed with 
the Physiocrats, expresses with clearness the assumption 
that the surplus tends to create its own consumers, an 
artisan class that has to purchase it with their toil. 

Thus the ferti ity of the land gives the power of yielding a surplus, 
a rent, by yielding a surplus quantity of necessaries beyond the wants 
of the cultivators ; and the peculiar quality belonging to the neces- 
saries of life, when properly distributed, tends to strongly and con - 
stantly give a value to this surplus by raising up a population to 
demand it. 2 

^antillon, Essai sur la nature du commerce, p. 5, 6. 

2 Malthus, Principles of political economy, Boston, 1821, p. 113. 



6 American Economic Association. [884 

We are not here concerned with the imperfect theory 
of distribution which assigned to the landlord the entire 
produit net, nor with the fantastic theory of production 
which imputed it wholly to the soil, or, sometimes, to 
agricultural labor. What is of interest is the extent of 
the surplus fund and the significance ascribed to it. 
The assumptions upon which its definitions are based 
are sufficiently unreal as applied to modern economic 
life ; but before the development of capitalistic society 
they were, perhaps, approximately correct. When 
habits of consumption were fixed and methods of pro- 
duction unchanging, the social development of each 
community was indeed closely connected with a distin- 
guishable surplus. 

Sec. 4. The Physiocrats, then, attempted to establish 
a physical basis for the growth of that part of society 
which distinguishes civilization from barbarism. They 
sought an explanation for the greatness of states con. 
ceived as units. Assuming at the outset, as they did, 
that the surplus flowed into the hands of the landowner, 
they did not enter into a discussion of its distribution 
among smaller units within the state. Yet they recog- 
nized the existence of a capitalist class, and admitted 
that the laborer could save "by parsimony." Thus a 
part of the surplus above the bare subsistence of labor 
remained in the possession of other classes besides the 
landlords. Unconsciously they had introduced a new 
class of problems, the further development of which was 
left to the so-called historical materialists. 

An increase in social income, distributed to the dif- 
ferent classes of a society in proportion to their original 
incomes, would increase the happiness of the society as 
a whole and advance it in civilization and culture. It 
would also increase its power to cope with other societies 



885] The Economic Surplus. 7 

in peace and in war. A surplus thus distributed is 
therefore a factor of great importance in international 
politics. Increase in social wealth, however, is not likely 
to result in a universal augmentation of the original in- 
comes of the members of society. Certain individuals and 
classes will almost inevitably receive more than the 
average proportion of it. The appearance of a surplus, 
therefore, will usually create new class distinctions, or 
emphasize those that already exist. The flow of new 
income causes one class to gain in power and another to 
decline. It is a potent factor in state politics, just as 
the surplus which is conceived of as an acquisition of an 
entire community is a potent factor in the politics of 
the world. 

It is, however, only upon the assumption of static 
methods of utilization that a surplus of this nature can 
at all adequately explain the relative rise and decline of 
societies or of social classes. A change in the habits of 
consumption, taking place simultaneously with an in- 
crease in wealth, may wholly neutralize its social and 
political influence. A wealthy state with luxurious 
habits is not necessarily more fitted to survive than a 
poorer state whose citizens have simpler tastes. If the 
development of the personal wants of a class keeps pace 
with the increase in its resources, it will not necessarily 
gain either in numbers or strength. Now in the ages 
preceding the distinctly modern epoch, standards of 
consumption were for the most part definite. The sur- 
plus of food produced was a rough indication of the 
probable magnitude of the non-agricultural population, 
and the wealth at the command of a social class was a 
not inaccurate index of its probable growth in power. 
In modern society, on the other hand, wants are so com- 
plex and subject to such great variations that it would 



8 American Economic Association. [886 

be hazardous to predict the result of any but the most 
striking changes in income. While, then, a surplus 
consisting in mere increase in wealth may, even in 
modern times, occasion changes in the relative political 
and social position of states and of classes, so many 
other factors enter into the problem that it is hardly 
safe to attempt to explain concrete phenomena by the 
emergence of surplus. The distinction between such 
surplus and non-surplus parts of income is of great im. 
portance in the discussion of certain historical problems, 
but it is questionable whether it throws any light upon 
problems of the present day. 

Sec. 5. As a rule the production of goods entails the 
loss of a certain amount of vital energy, and the con- 
sumption of the goods produced restores energy to the 
human organism. Man has frequently existed in en- 
vironments which afforded him subsistence only in re- 
turn for the expenditure of all the energy which he 
possessed. In such circumstances a change in activities 
which would require greater exertion would be injurious, 
and any change in the direction of energy, even though 
it did not mean an increase in its absolute amount, 
would be attended with serious risks, and would natu- 
ally be avoided. Where, on the other hand, the environ- 
ment has been so favorable that the consumption of the 
goods created by a day's labor has yielded a quantity of 
energy more than sufficient to produce an equal amount 
of goods, variations in the forms of activity have been 
possible. Where under such circumstances a compe- 
tition for existence took place among individuals or 
groups of individuals, a law of survival may have 
forced the surplus of energy to find a vent in new forms 
of activity. The presence of surplus energy thus ap- 
pears as a possible basis for variation in activity, and 



887] The Economic Surplus. 9 

under the pressure of competition for life may become 
a real cause of economic and social progress. Such is 
the part that is assigned to surplus energy in Professor 
Patten's theory of progress, 1 in which each adaptation 
to the environment sets free new surplus energy which 
automatically transmutes itself into progress. 

Whether or not one accepts Professor Patten's theory 
as a satisfactory account of progress, one can hardly 
deny that it points out a factor which deserves consider- 
ation from all who seek for an explanation of the 
development of a dynamic society out of apparently 
changeless barbarism. There is accordingly a set of 
problems which justifies the distinction between the 
energy which is necessary to conserve human life in its 
existing conditions and the energy which is free and 
available for new uses, and which justifies the parallel 
distinction between the parts of income which may be 
regarded as the objective forms of such classes of energy. 

The three forms of surplus that have been described 
may indeed be properly denominated surpluses. Those 
parts of income — or income transmuted into energy — 
which account for continued, though unchanging, con- 
ditions of life represent the non-surplus. Those parts 
of income that explain change or progress form the sur- 
plus fund. If it is indeed the essential function of eco- 
nomics to explain progress or change, political and 
social, some one of these is rightly termed the economic 
surplus. 

SEC. 6. Much of the pleasure and pain of life results 

1 Theory of prosperity, pp. 186, 187, et passim. It is to be observed 
that in Professor Patten's exposition the first step in progress, from 
which surplus energy originally results, is mere chance adjustment to 
the environment. This requires the unnecessary assumption that 
primitive man actually lived in an environment that barely afforded 
him subsistence. 



io American Economic Association. [888 

from the consumption and production of economic goods. 
A popular measure of welfare is the net amount of 
pleasure that results from the entire economic process. 
It has often been said that the true criterion of economic 
amelioration is the growth of the surplus of happiness 
afforded by economic activities. Not increase in power 
or in wealth or in energy, but increase in the sum of pro- 
ducers' and consumers' rents is the index of progress. 1 
One need not accept the growth of surplus satisfaction 
as an adequate explanation of the meaning of progress, 
yet it may serve as a working principle in default of a 
better. The distinction between those satisfactions 
which are merely sufficient to cover economic discom- 
forts and those which are a net gain to man thus serves 
to satisfy an intellectual need, and hence requires no 
further justification. 

Psychological science has for a long time protested 
vehemently against the view which makes economic life 
a mere balancing of pleasures against pains. The pro- 
test has received little attention from economists — prob- 
ably less than it deserves. Economic conduct consists 
in a series of options determined by a complex of final 
causes, of which pleasure and pain may be selected as 
typical, although they are perhaps not even the most 
important ones. It would be erroneous, however, to 
suppose that the adoption of the psychologist's point of 
view would revolutionize economic theory. Economists 
are not particularly interested in the analysis of motives. 
They seek to explain activities, and assume motives 
merely as a convenient starting point. In every eco- 
nomic act there is a balancing of motives, and what the 
particular motives may be is to the economist a matter 

' For a detailed discussion of progress regarded from this point of 
view see Nicholson, Principles of political economy, iii, book iv. 



889] The Economic Surplus. 11 

of small moment. It is convenient to class all motives 
which make for the performance of an act under a 
single head, utilities, and all those which dissuade from 
action under the head of disutilities. Nothing more 
detailed is needed for the purposes of economic theory. 
Whether one chooses to regard economic conduct as 
the result of a balancing of pleasures and pains, or of 
utilities and disutilities, denned as above, it is evident 
that the economic process will usually yield a surplus of 
pleasure or utility above pain or disutility. Utilities 
will fall into two classes, those which merely over- 
balance disutilities, and those which are without any 
offset. Now it is clear that the former class will ac- 
count for the totality of economic phenomena. The 
surplus has no economic potency whatsoever. Whether 
the motives that lead to an act just outweigh the mo- 
tives that tend to prevent it, or enormously overbalance 
them, the act is performed. 1 Whether the pay for the 

1 The objection will be raised that the surplus determines the order 
of economic choices, and therefore possesses economic potency. If 
the commodity A yields a surplus of ten and B of five, will not A be 
chosen first? Certainly. But what is the net economic effect of this 
order of selection if both are chosen anyway? If it is necessary to 
choose between the two, A yields a surplus of only five, since the 
choice involves the surrender of B. The question that then arises has 
to do with the economic potency of the pure surplus of A, represented 
here by five. Say that the surplus were reduced to one, would not A 
still be chosen ? So long as A affords the least surplus it will be 
selected in preference to B. It is the part of surplus above the 
minimum which determines choice that is here affirmed to be of no 
importance in the t xplanation of economic conduct. 

A kind critic has suggested that if ten units of labor in producing A 
yield a surplus, while the eleventh just pays, and out- unit of labor in 
producing B just pays, the surplus really determines the apportion- 
ment of labor. We may say that the first unit in the production of A 
yields a surplus of 10, the second 9, and so on, down to almost nolh- 
ing. If, however, the surplus on the earlier units of A were reduced 
to such a mere -f, the apportionment would remain the same. It is 
the extent to which production may be carried on without descending 
below the minimum ground of choice, and not the amount of the sur- 
plus, that determines the apportionment. 



12 



American Economic Association. [890 



first hour of a day's labor merely suffices to insure its 
performance, or is far more than sufficient to do so, the 
work is accomplished. Whether the former relation of 
motives holds through the day, or whether each hour 
up to the last affords an appreciable surplus, the quantity 
of economic activity remains the same. It cannot be 
objected that the laborer would refuse to work under 
the former conditions, or would work less diligently, 
for in that case the alleged surplus would not be surplus 
at all, but would form a part of the sum of utilities 
necessary to determine the choice to work. The same 
analysis may be applied to the so-called consumers' sur- 
plus. If it is indeed a surplus, it is an economic epi- 
phenomenon. Economic theory has no occasion to take 
cognizance of its existence. 

It may be said that if the first hour of labor yields 
no surplus, the second hour will probably yield a nega- 
tive surplus, and will therefore be left undone. That 
is quite true, but it merely signifies that the presence 
of a surplus serves as a basis for predicting the con- 
tinuance of labor. It is not therefore a cause of con- 
tinued labor. The shape of the utility curve gives us 
important information as to the value of a commodity 
under varying conditions of supply and demand, but the 
surplus included by the utility curve plays no part in 
economics until it ceases to be a surplus. 1 

1 The price curve of any commodity is theoretically ascertained by 
establishing the importance of any unit under all possible relations of 
supply and want. Say that but one unit is in existence, and the im- 
portance of it is one hundred. With the same volume of wants, a 
hundred-fold increase in the number of units of supply may reduce 
the importance of any unit to ten. It is usually assumed that the 
theoretically first unit will then yield a surplus of ninety. If we 
analyze the nature of this alleged surplus, we find that in the first 
place it contains an element of actual satisfaction, or rather utility. 
A hungry man does unquestionably receive more pleasure from the 



891] The Economic Surplus. 13 

Sec. 7. At any particular time there is a rate of 
wages that a workman will consider natural and there- 
fore just. A skilled laborer may believe that three 
dollars a day is a fair wage. Offer him two and a half 
and he will probably refuse it with indignation. This 
does not mean that the reduced wage might not cover 
all the sacrifice that the performance of labor involves, 
nor does it mean that the money earned in the last hour 
does not cover the actual disutilities, consisting in weari- 
ness and deprivation of liberty, entailed by that hour of 
labor. When unemployed he may crave the exercise of 
his accustomed activity, yet he would feel that to work 
for the low wages would mean the incurring of a net 
loss. If, on the other hand, he is offered three dollars 
and a half for a day's labor, he feels that he is receiving 
a net gain. Manifestly there is no a priori reason why 
three dollars should be the income selected as the pre- 
eminently just one. It is a matter of common experi- 

first slice of bread which he consumes than from the last. This sur- 
plus, however, is insignificant when compared with the total surplus 
which figures in the diagrams so popular in economic discussions. 
The second part of the surplus consists in the " pain obviated " by the 
presence of food. The first part of the surplus is a fact of conscious- 
ness, the second part is something which exists neither in conscious- 
ness nor outside of it. It is an idea with no foundation in reality. 

Hobson, Economics of distribution, p. 41 etseq., has pointed out 
the true nature of this curious " surplus." Deprivation of food is the 
destruction of human life ; therefore when the supply of food is 
threatened the whole worth of life objectifies itself momentarily in 
the possession of food. The control of the bare means of existence 
represents the utility of all that one has or ever hopes to have. To 
assign the utility of all of the goods of life to each one of the neces- 
saries of life is so obviously fallacious that it is astonishing that it has 
ever been done outside of the popular rhyme that ascribes the loss of 
horse and rider and battle "all to the want of a horse shoe nail." 
The subjective surplus, described in the only legitimate way as an 
actual surplus of satisfaction, does not even give us information with 
regard to the price curve. That it exists is a ground for optimistic 
reflections as to human destiny, but it seems to have no further signifi- 
cance in economics. 



14 American Eco?w7nic Association. [892 

ence that the standard of just payments varies from age 
to age and from place to place. The coolie no doubt 
has his ideas of what is fair in wages, just as the skilled 
mechanic of America has his. The standards, we can 
readily see, are based upon experience. What a man 
has been accustomed to have, and what he sees those 
whom he regards as of his kind receiving, determines 
what he will feel should be his in the present. 

There are likewise rates of interest that are conceived 
to be just, and rates that the natural man, at any rate, 
would pronounce unjust. The same thing is true of 
prices. These standards, like the standards of just 
wages, are indisputably the result of experience of what 
has been or of what is elsewhere the case. 

It is possible to divide actual incomes into two parts, 
one of which corresponds with such standards, while the 
other measures the variation, positive or negative, from 
them. The same classification will hold for prices, 
since prices are merely undistributed incomes. Now it 
is clear that the first part of income, if isolated, would 
tend to perpetuate the kinds and volume of the activities 
which produced it. The second part, whether positive 
or negative, would lead to a change in such activities. 
The laborer who feels that he is not treated fairly as 
compared with others of his kind, who believes that his 
income is diminished by the existence of negative sur- 
plus, will seek to put himself in a position where he may 
secure greater advantages. He may be personally un- 
able to do so, but his active discontent will serve to urge 
others who are in a like unfavorable situation, but who 
are not so specialized that they are unable to change 
their place in the economic organism, to seek the oppor- 
tunities that more favored workers possess. If the 
entire class is degraded, and movement is impossible, 



893] The Economic Surplus. 15 

there are still likely to be influences at work lessening 
the efficiency of laborers, and cutting down their num- 
bers. A positive surplus has a similar set of effects, but 
in the opposite direction. 

A surplus of this kind is an evidence of a dynamic 
change that has taken place. The existence of 
standards points to the fact that within a certain limited 
field incomes have been static. A perpetually changing 
rate could afford no expectation as to the future. Viola- 
tion of standards shows that a change in the economic 
situation of the classes who hold standards of income has 
taken place. But the existence of the surplus has a 
more important significance for economics than this. 
It indicates that further dynamic movements must take 
place. Industry must be rearranged until the surplus 
annihilates itself in the creation of new standards. 1 

SEC. 8. It is a well recognized fact that the productiv- 
ity of any economic agent is conditioned both by its 
own inherent qualities and by its quantitative relations 
with complementary agents. The productivity of a 

■The writer is aware of the fact that the term " standard " as em- 
ployed in this section violates, to a certain extent, established usage. 
By "standard" incomes we usually mean those which would exist if 
industry were suddenly to obey the laws of free competition The 
term is here used to designate an income which has been established 
long enough to have become a fixed datum in the social consciousness. 
If the incomes of all laborers were suddenly to conform to produc- 
tivity, large numbers of laborers would at first be influenced exactly 
as though they found themselves in a specially favored environment. 
Instead of rendering society static, the change would render it in- 
tensely dynamic. When, however, the laborers have become accus- 
tomed to their new incomes, and look upon them as a matter of 
course, the dynamic influence of the new order becomes unimportant. 
Income which is socially regarded as a surplus, even though from the 
point of view of pure theory it is not a surplus, exerts the dynamic 
influence of a surplus income. In seeking for a distinction between 
incomes which account for change and incomes which account for 
persistence, it appears to be best to define the latter as incomes which 
are socially regarded as normal. 



1 6 American Economic Association. [§94 

given agent will increase or decline with the increase or 
diminution in the quantity of complementary agency 
combined with it in production. If we assume the 
worst possible economic position for labor, its economic 
product will be zero. It will be a " free good," and the 
entire return which it cooperates in producing will be 
imputable to the other factors in production. If the 
quantitative relations are varied, the share of labor 
emerges and increases, while that of the other factors 
diminishes. When such changes in the relations of the 
factors of production actually take place, the resulting 
increase in income for the favored factor, and decline for 
the factors which are prejudiced, are at first felt to be sur- 
pluses, positive and negative, similar to the surpluses 
discussed in the last section. They set in motion second- 
ary dynamic forces opposite in direction to the forces 
which created them. If the secondary force is less power- 
ful than the primary one, it spends itself before it can re- 
store the former quantitative relations, and new standards 
for the incomes affected are established. When, for ex- 
ample, capital increases relatively to labor, the immedi- 
ate effect is to create higher wages and lower interest. 
A positive surplus appears in wages, a negative surplus 
in interest ; and the effect of the existence of such sur- 
pluses is a further dynamic change. Labor will probably 
increase in volume, while the rate of saving will be 
somewhat diminished. These effects need not, however, 
be sufficient to neutralize the effects of the original in- 
crease of capital. After the second set of dynamic forces 
have exhausted their influence, there may be a net gain 
to labor and a net loss to capital. 1 

1 As will readily be seen, this is essentially the surplus which 
appears in Professor Clark's discussion of static incomes. For the 
sake of simplicity Professor Clark has abstracted from the effects of 



895] The Economic Surplus. 17 

If we wish to explain consistently the existence in the 
present of the standards that are so important in eco- 
nomic life, we can but begin by assuming a time when 
each concrete income was felt to be a surplus. That 
surplus, unneutralized by dynamic results, was first crys- 
talized into a standard ; and that standard has received 
a succession of accretions, as the dynamic forces which 
create surplus income have exceeded in power the dy- 
namic forces which surplus income itself creates. Stand- 
ard or static incomes thus resolve themselves into series 
of surpluses which we may term static, not from their 
causes but from their freedom from dynamic results. 

SEC. 9. It is not claimed that the foregoing classifica- 
tion of surplus funds exhausts the list that economic 
writings offer. In current theory, however, when an in- 
come is classed as surplus, it is usually from one of the 
points of view which have been enumerated. It is here 
maintained that for the purposes of economic classifica- 
tion all are not equally significant. Economic science 
exceeds its domain when it creates classifications that 
have no immediate bearing upon its own central prob- 
lems. What those problems will be in the future we 
have no means of knowing, but in the present economic 
interest unquestionably centers in the problems of value 
and distribution in a state of society in which competi- 
tion rules. Current theory seeks to explain the activi- 
ties which result in the establishment of standards, and 
those which cause the standards to change. A present 
income reacts upon future economic activity. Some in- 

the secondary dynamic influences — not overlooked them, as some of 
the critics of ' ' The distribution of wealth ' ' have supposed. In order to 
escape a similar misunderstanding, it is here assumed that the stand- 
ards which may historically be analyzed into surpluses result from the 
net force which remains active after opposing forces have been 
neutralized. 

2 



i8 American Economic Association. [896 

comes tend to maintain themselves unchanged ; others 
possess a power to induce change, a power which by its 
own nature must disappear, leaving behind it a perma- 
nent income which assimilates itself to the class of stand- 
ard incomes, tending in like manner to perpetuate it- 
self. The phenomena of standards, of economic persist- 
ence, are manifestly primary in a theoretical sense ; the 
phenomena of change, though accounting genetically 
for the existence of standards, are at any given point of 
time secondary. Accordingly, to classify as surplus the 
incomes which at a given time promote change meets 
the claims of economic logic. The dynamic surplus is 
the economic surplus par excellence. 

Normal wages may be taken as a type of standard in- 
comes, and pure profit, or at least certain elements in 
pure profit, as typical of economic surplus. Where are 
we to place the rent of land ? Does it develop standards 
which tend to perpetuate themselves, or does it tend to 
disappear ? A satisfactory answer to this question, it is 
here maintained, would sufficiently determine the posi- 
tion of rent in economic theory. It would decide 
whether rent is to be classed with wages and in- 
terest, or with profits and monopoly return. The con- 
ception of rent is, however, far from clear, and its eco- 
nomic relations are the subject of vigorous controversy. 
It will, therefore, be necessary to define what is here 
meant by the term rent, and to examine the theoretical 
validity of the long series of distinctions that have been 
drawn between rent on the one hand and wages and in- 
terest on the other, as well as the significance of the 
analogies that have led economists to regard rent as a 
species of profit or of monopoly gain. 



CHAPTER II. 

LAND AS AN INDEPENDENT FACTOR IN PRODUCTION. 

Sec. io. Of the concrete forms of income that have 
usually been classed as surplus, the rent of land was the 
earliest to be defined ; and so prominent a position has 
been given to it that the terms " rent" and " surplus" 
have come to be used interchangeably. If a form of 
income appears to be a surplus, it is at once treated as a 
kind of rent ; if it presents some of the peculiarities of 
rent, it is forthwith christened surplus. If rent is re- 
garded as characteristically differential, all incomes that 
from one point of view or another are differential are 
called surpluses. If surplus income is defined as resi- 
dual, all residual incomes are termed rents. It is no 
wonder, then, that practically every part of the income 
of society has been classified as rent by one economist 
or another, and that two of the foremost thinkers of 
modern economics, Professor Clark and Professor Patten, 
have — though for widely different reasons— concluded 
that rent is merely one aspect of an income which from 
other points of view bears another name. 

It is a commonplace of historical economics that land 
was first given the rank of a factor in production co- 
ordinate with labor and capital for the simple reason 
that in England, the home of classical political economy, 
the landlords formed a social class distinct from the 
capitalists and laborers. 1 Land, it is said, is therefore 
merely an historical category, significant only in a 
society such as that of England in the early nineteenth 
century. We may admit that in a country in which all 

1 Held, Zwei Biicher zur socialen Geschichte Englands, 161. 



20 America?i Economic Association. [898 

classes share in greater or less degree the benefits of 
landownership. theorists would not have been so likely 
to perceive, or at any rate to emphasize, the differences 
between land and other property which like it produces 
a permanent income. This does not mean, however, that 
land, by whatever characteristics it is defined, is to be re- 
garded as a distinct source of income only where landlords 
are a sharply defined social class. The history of science 
furnishes numerous examples of truths which remained 
unknown until the examination of phenomena of a 
transitory nature drew attention to them. They do not 
necessarily become untrue or unimportant when the 
particular need to which they owe their introduction to 
thought has passed away. When the recipients of the 
income from land constitute a special class in society, 
the laws which govern the progress or decline of rent 
have an additional political and social significance, since 
such progress or decline must necessarily affect the 
social constitution. 1 But class problems are beyond the 
bounds of economics proper, which is at present pri- 
marily concerned with the laws governing the produc- 
tion and distribution of wealth, rather than with the 
more remote sociological effects of such production and 
distribution. 

It will be readily admitted that if land can be dis- 
tinguished from artificial productive goods by character- 
istics that are of true economic significance, the rent of 
land should be treated as a distinct form of income. 
Any category consists of a group of phenomena which 
are due to the same general causes, or are affected, in 

1 Professor Patten regards the category of ground rent as irrelevant 
to a study of the economic laws which prevail in a society like that 
of modern America (Theory of prosperity, p. 5). But the problems 
which Professor Patten endeavors to solve would at present be called 
sociological rather than economic. 



899] Land as an Independent Factor in Production. 21 

the main, by the same forces, or which, if they possess 
causal efficiency, are similar in those effects which are 
selected as of primary importance. No one questions the 
validity of a distinction between labor and capital, and 
the reason is simply that the two factors naturally con- 
trast themselves. Only extremely metaphysical econom- 
ists are compelled to rely upon class distinctions to mark 
off the one from the other. Some writers have indeed 
classified as interest certain parts of the income of 
laborers ; as, for example, the reward for acquired skill. 
Origin in abstinence they assume to be the distinguish- 
ing characteristic of capital, and acquired skill the 
result of a sacrifice of present enjoyment for the sake of 
future gain. There are, however, other facts besides 
origin that must be taken into account in the establish- 
ing of economic categories. Does an increase in capital 
diminish the return to acquired skill, or is it rather an 
increase in population that cuts down the income of 
skilled laborers ? Does an increase in skilled labor lower 
or raise the rate of interest ? It appears to be reasonable 
to hold that skilled labor is subject to the same dynamic 
influences as unskilled labor, not to the influences 
which affect capital. It is best, therefore, for the pur- 
poses of economic theory to restrict rather than to ex- 
tend the conception " personal capital," and to regard 
all labor as contrasted with capital. The characteristics 
which were at first chosen to distinguish land from 
capital were unquestionably inadequate for the purpose. 
There may, however, remain good reason why it is 
theoretically justifiable to treat land as an independent 
factor in production. 

y SEC. 11. Early political economy found no difficulty 
in distinguishing between the several factors in produc- 
tion. Adam Smith and his immediate followers usually 



22 American Economic Association. [900 

dealt with types that were so chosen as to contrast 
strongly, not with classifications which were designed to 
include all phenomena that should logically be included. 
Labor was represented by the manual worker who gave 
shape to commodities at the expense of fatigue and pain. 
Capital was a stock of producers' goods which had been 
endowed with their usefulness by human agency. 
" Land " meant a field or meadow which had suffered 
little transformation beyond the slight changes incident 
to the growing and gathering of its produce. Toil, 
goods created by toil, and goods freely given by nature, 
— these were three perfectly definite categories. Adam 
Smith, indeed, marred the clearness of this classification 
by including under land all agricultural improvements. 
But even where much labor had been spent on improve- 
ment, land appeared to be quite distinct from instru- 
ments created by labor. 

As soon as the work of establishing thoroughgoing 
classifications was undertaken, it became evident that 
many other kinds of producers' goods were as truly the 
free gifts of nature as was land. Hence it came to be 
the fashion to substitute the term " natural agents " for 
land. We may take Say and Senior as representatives 
of this tendency : 

Under the term "the Agents offered to us by nature," or, to use a 
shorter expression, "Natural Agents", we include every productive 
agent so far as it does not derive its powers from the act of man. 1 

At the same time that the term " land " or " natural 
agents " was applied to a constantly increasing group of 
objects, a tendency manifested itself to withdraw from 
the category of land elements in its productivity which 
are due to human agency. 

1 Senior, Political economy, p. 5S. 



901] Land as an Independent Factor in Production. 23 

A hot house for the raising of exotic plants, a meadow fertilized by 
judicious irrigation, owe the greater part of their productive powers to 
works and erections, the effect of antecedent production, which form 
a part of the capital devoted to the furtherance of actual and present 
production. The same may be said of land newly cleared and brought 
into cultivation ; of farm-buildings ; of enclosures ; and of all other 
permanent ameliorations of a landed estate. These values are items 
of capital, though it be no longer possible to sever them from the soil 
they are attached to. 1 

A hothouse or an irrigation plant may, in thought at 
least, be separated from the land to which it lends 
productivity. But when a field is cleared of stones, 
there is no material thing, apart from the land itself, 
which can be called the product of labor. Such land 
is a material object to which utilities have been added 
by human exertion. Nothing more, however, can be 
said of any of the so-called products of labor. Why 
should one say that labor produces a brick, but merely 
adds intangible utilities to land ? From an economic 
point of view as radical a change has taken place in 
the land which has been reclaimed from bog or jungle 
as in the iron which has been won from the ore. The 
terrace gardens of Europe owe their usefulness to 
toil ; they are the product of labor, if any commodity 
can be so designated. But if we admit that land in its 
economic aspect may sometimes be the product of labor, 
logic demands that we classify as the product of labor all 
soil the utility of which has been enhanced by labor. 
As applied not to values but to physical objects, " made 
by labor " is a quality which does not admit of degrees. 
It does not distinguish between an ordinary brick and 
the most exquisite products of industry. With such a 
quality as the distinguishing characteristic of capital, 
coal in the depths of the earth becomes capital the 
moment when the first earth is removed from the mouth 

1 Say, Treatise on political economy, Biddle, Boston, 1824, p. 16. 



24 American Economic Associatio?i. [902 

of the shaft. The soil of the earth becomes capital 
when the first furrow is run — indeed much earlier, for 
as soon as the pioneer sets out for his new home, he has, 
in effect, expended labor for the reduction to usefulness 
of virgin soil, and value begins to flow into that soil. In 
this view the transforming of natural agents into capital 
is little more than a rite. 

SEC. 12. It was inevitable that the more logical eco- 
nomists should discard a distinction which was as color- 
less as this. Some have decided to designate as capital 
whatever may be changed at all by human agency, thus 
leaving to the category of land nothing but the qualities 
of extension and position. This is practically the view 
of Professor Commons. 

What land furnishes to all industries is simply room and situation. 
This is the fundamental idea of land in production and distribution, 
it is nothing more than the bare surface of the earth. Not land, but 
capital, embodies the forces, energies and material of nature. . . . 
. . Soil is capital as soon as labor is employed in clearing the land, 
draining, fencing, plowing, fitting, fertilizing and planting. 1 

Almost the same position is maintained by Professor 
Marshall : 

When we have inquired what it is that marks off land from those 
material things which we regard as products of the land, we shall find 
that the fundamental attribute of land is its extension. 2 

What this is, however, that is bought and sold and 
" economized " generally under the name of land is not 
mere " room and situation " or " extension " : it is a 
physical object with numerous qualities of which fer- 
tility and capacity for support may be taken as typical. 
Surface extension is the quality selected for quantitative 
measurement, just as weight is selected to measure other 
physical objects of economic importance. Economically, 

1 Commons, The distribution of wealth, p. 29. 

2 Marshall, Principles of economics, p. 192. 



903] Land as an Independent Factor in Production. 25 

extension and weight are not " fundamental," although 
the objects which possess them could not be conceived 
without them. The importance of land varies from zero 
to a positive quantity of a high degree according to its 
situation relatively to population. Situation is not 
therefore the fundamental quality that endows land with 
utility. Beef may be a free good in parts of South 
America ; we should not for that reason say that it is 
situation alone that gives it value in New York. L,and 
possesses, indeed, " place utility " ; it possesses also ele- 
mentary and form utilities ; and it would be hazardous 
to declare that for all land one kind of utilities rather 
than the others is fundamental, and distinguishes land 
from all other economic goods. 

It is not difficult to see what it is that has led to the 
adoption of such an ethereal conception of land. It is 
desired to find a clear distinction between land on the 
one hand and the products of labor on the other. Ex- 
tension and situation are indeed something that labor 
cannot literally create, while many of the other qualities 
of land may be artificially produced. While, however, 
the value of clear distinctions cannot be denied, this 
distinction, it is obvious, does not really mark off one 
class of economic phenomena from another, and is there- 
fore valueless. 1 

SEC. 13. Another view, frequently associated with the 
foregoing, distinguishes between land and capital on the 
ground that they do not bear the same relation to cost. 
The early economists held that capital derived its value 
from cost, while the value of land was dependent solely 
upon limitation. This view appears in Adam Smith, 

1 For a further discussion of the futility of this distinction between 
capital and land see Fetter, Recent discussion of the capital concept, 
Quarterly Journal of Economics, Vol. XV. 



26 American Economic Association. [904. 

and is still common wherever the cost theory of value 
survives. But even among those who recognize that the 
value of capital and land alike is determined by productiv- 
ity, and that limitation, not cost, is the true determinant 
of productivity, there are some who are inclined to draw 
a distinction between the two agents on the ground 
that the value of capital tends to equal cost, while 
that of land shows no such tendency. The form of 
cost that figures here is obviously entrepreneurs' cost — 
the expenditure in money or its equivalent necessary for 
the production of a good. It is the contention that the 
value of a capital good tends exactly to cover this ex- 
penditure, while the value of land, in a progressive so- 
ciety, nearly always exceeds the cost of appropriating it 
and preparing it for use. A conservative expression of 
this view is that of Sidgwick : 

At the same time I think it reasonable to assume that the rent of 
much agricultural land in England is materially in excess of interest 
(at the present rate) on the expenditure that would now be required 
to bring it from its original condition to its present degree of efficiency 
for supplying its markets with agricultural produce. 1 

The value of land, then, exceeds the cost that was in- 
curred in the appropriation and improvement of the 
land, while the value of any capital good equals its cost. 
If we examine the assumptions upon which this view is 
based, we find that in the case of the capital good the 
assumption of perfect competition in production and sale 
is essential to the truth of the proposition. Such com- 
petition implies that both buyer and seller possess ade- 
quate knowledge of the current production and of prob- 
able future changes in its volume, and that there is per- 
fect freedom from all forms of combination and from favor- 
itism on the part of government or quasi-governmental 

1 Sidgwick, Principles of political economy, 3d ed., p. 287. 



905] Land as an Independent Factor in Production. 27 

functionaries. Moreover, it implies that all changes 
which can not be foreseen will be met by a perfect 
system of insurance which eliminates risks for the indi- 
vidual producer. Under these conditions all will agree 
that a capital good as it leaves the producer will have 
a value exactly equal to its cost. At any later date its 
value will be less than cost ; but we may look upon a 
worn implement as merely a fragment of a former whole, 
as a certain number of the utilities that were formerly 
embodied in the new implement, and may conceive of it 
as still worth what it specifically cost, the other utilities, 
destroyed in use, having been replaced out of the sinking 
fund that a properly calculated capital good would 
create, or having been paid for in consumers' goods of 
equal cost and value. 

It is obvious that these assumptions are unreal, but 
they are useful for certain theoretical purposes. If, 
however, we wish to distinguish between land and 
capital on the basis of such assumed conditions, we must 
be careful to apply the same assumptions in discussing 
the relation of land value to the cost of appropriating 
and improving it that we apply to capital in the discus- 
sion of the relation of capital value to capital cost. 

If, in the traditional manner, we postulate a settled 
community with unoccupied land upon its borders, and 
trace in imagination the gradual growth of population 
and the progress of the appropriation of land, assuming 
force and fraud and favoritism out of existence, as we do 
in the case of capital, and assuming full knowledge on 
the part of numerous persons of the current and future 
demand for the products of the soil, it is obvious that 
each zone of new land would be appropriated just when 
the cost of occupation would be covered by the value 
which the newly occupied land would possess. At that 



28 American Economic Association. [906 

particular time, then, the relation of the value of land to 
its cost would be identical with the relation of capital 
value to capital cost. If we use the term " income " in 
a sufficiently broad sense, this would mean an identical 
relation of permanent income from property, whether 
capital or land, to the cost of acquiring that property. 
If by " income " we mean the goods actually produced, 
there would, indeed, always be a disparity in the earn- 
ings of forms of property of equal value and equal cost. 
This would result from the fact that each form of 
property would change in value for reasons partly in- 
dependent of its current productivity ; hence there 
might be a rise in value which would be estimated 
as a net addition to the income in goods produced, or a 
decline which would have to be deducted from such in- 
come. 

In the circumstances which we have assumed, the 
value of the land would rise ; accordingly a part of 
the income from the land would take the concrete form 
of an " unearned increment" in land value. Artificial 
goods, on the other hand, would deteriorate, but the 
gross value which they would produce would be so great 
that the net value which would annually accrue to their 
owner would be exactly equal to the net annual addition 
to the wealth of the landowner. Through exchange 
either property owner could turn his net income into 
consumers' goods adapted to his use, leaving the sources 
of his income unimpaired. Social habits, indeed, might 
discourage a man from alienating that part of his income 
which consisted in the increased value of land, since 
such alienation would require either the selling of a 
part of the land or the creation of a mortgage debt — acts 
which carry with them the stigma of impoverishment. 
It is conceivable that a social habit might arise com- 



907] Land as an Independent Factor in Production. 29 

pelling the ordinary capitalist to set aside as permanent 
capital a fraction of his annual interest, just as it is 
coming to be the approved custom for a corporation to 
accumulate a surplus fund. But such a habit would 
not alter the economic nature of the increase in wealth. 
It would still remain a portion of the net income. 

Any one who purchased the land from its original 
occupant would, as Sidgwick asserts, pay more for it 
than the cost in labor and capital that would then be 
required to bring it from its original condition to its 
state of productiveness at the time of purchase. But the 
cost in labor and capital that the first occupant incurred 
in improving the land was only a part of its total cost 
to him. Another part consisted in the consumers' goods 
which he had to forego in order to hold the land and 
secure the increase in value. If to-day I purchase a 
piece of land which yields no income, but which I ex- 
pect to rise in value, it would be obviously absurd to say 
that when I sell it ten years from now the total cost to 
me will be the price I paid for it. The interest on that 
outlay for ten years which I shall forego will be just 
as much a part of the cost as the principal. From the 
point of view of the individual landowner, the increase 
in value of land is the reward for a form of abstinence 
which is as true a cost as any which the capitalist under- 
goes. Assuming perfect competition, — competition en- 
lightened by foreknowledge of future conditions, — the 
relation of land value to cost does not differ from the 
relation of capital value to cost so far as the individual 
buyer or seller is concerned. 

Land has not, however, been appropriated under con- 
ditions of perfect competition. Favoritism and fraud 
have tainted much of the original occupation of land 
even in our own relatively just age. Mere chance has 



30 America?i Economic Association. [908 

played an enormous part in the distribution to indi- 
viduals of the value of land, enriching some and des- 
poiling others. It is impossible to say whether or not 
the total value of the land in this country exceeds its 
cost to individuals, including in cost both of the ele- 
ments discussed above. Moreover, any investor in land 
is uncertain whether he will gain through abnormal in- 
crease in value, or lose through less than normal in- 
crease or positive decline ; and uncertainty, it must "be 
remembered, is itself a form of cost, and must be taken 
into account when we estimate total cost. 

Yet, when all is said, the great mass of the land value 
of to-day is the result of a reasonably calculable rise 
which has taken place since the era of wild speculation 
and land robbery. That rise is capitalized in the pur- 
chase price long before the circumstances of current 
production warrant a change in the value of the land, and 
to the present landholders it represents the reward for sav- 
ing. There are still, and probably always will be, spas- 
modic movements of population which transfer values in 
an unforeseen manner from one to another. Chance in- 
comes will always attach themselves to landownership. 
But in this respect land can not be placed in a class by 
itself. All of the elements that vitiate a competitive 
valuation of land influence the market value of capital 
goods. No one is unfamiliar with the enormous specula- 
tive gains that result from dealing in stocks that represent 
nothing but aggregates of capital goods of reproducible 
kinds. The increase in the value of wheat which takes 
place between October and May is the result of a normal, 
inevitable, calculable change in the relation of supply to 
demand. The normal increase in laud value is the 
same, in essence, differing only in the fact that it ex- 
tends through a period which, measured by the length 



909] Land as an Independent Factor in Production. 31 

of human life, is indefinite. Along with the regular and 
normal increase in value there are always spasmodic 
variations which result in great speculative gains and 
losses. And what is true of land and wheat is true of 
practically every commodity on the market. Absence 
of chance income is the exception, not the rule. 

Thus if we assume rigidly static conditions, we do not 
find a difference between land and capital, so far as cost 
to the individual landowner is concerned. If, on the 
other hand, we take into account all dynamic factors, 
we must admit that the value of neither capital nor land 
corresponds very closely with cost, and that, moreover, 
it is impossible to prove which factor shows the greatest 
average variation from cost. 

SEC. 14. The question will naturally arise whether 
this discussion does not overlook distinctions that are of 
fundamental importance. We may grant that the hold- 
ing of land involves subjective costs similar to those 
which are borne by the capitalist, yet we may deny that 
it is of real social utility that anyone should assume 
such costs. If one decides that instead of consuming 
his entire income he will use part of it for the produc- 
tion of a new machine, society is clearly the richer by 
an additional source of income. But if he uses the 
same part of his income in the purchase of a right to 
secure an increase in the value of land, an increase that 
takes place quite without regard to the act of purchase, 
wherein is society benefited ? Is our stock of land in- 
creased, or its productivity enhanced? Again, when 
new capital is created, productive energy is diverted 
from the making of goods for consumption to the crea- 
tion of producers' goods. The abstinence which figures 
in the creation of artificial capital goods thus means a 



32 American Economic Associatio?i. [9*0 

diminution in the sum of immediate social satisfactions. 
Is there an analogous cost in the case of land ? 

As Professor Clark has clearly shown, 1 the capitaliza- 
tion of the expected rise in land value is in modern 
times one of the the chief immediate inducements to 
the development of new countries. The earnings of a 
settler on the Western prairie, apart from the increase 
in the value of his homestead, were for decades ridicu- 
lously low. No one not under the pressure of extreme 
want would have cared to pass years of his life in a log- 
house or dug-out if he had had nothing to expect beyond 
the scarcely marketable products which the soil afforded. 
Had there been no prospect of increased land value, the 
progress of settlement would have been far slower than 
it has actually been. It would have required a material 
rise in the price of food to extend the area of cultiva- 
tion. Instead of a condition in which food is far in 
excess of the bare needs of society, we should have a 
condition in which the pressure of population upon sub- 
sistence would be an indisputable fact. Willingness to 
assume the abstinence involved in land-ownership has 
increased the effective land at the disposal of society, 
and therefore has been of social utility, like any other 
form of rational economic sacrifice. 

But now that practically all the free land of the 
country has been appropriated, it may seem that this 
form of abstinence has ceased to be of social importance. 
It must, however, be borne in mind that the work of 
developing land, of raising it from a low grade of social 
utility to a higher one, may continue indefinitely. In 
this developmental activity the expectation of an in- 
crease in value plays an important role. Highways are 
constructed and streets are graded and paved far beyond 

1 In lectures given at Columbia University, 1S99. 



g 1 1] Land as an Independent Factor in Production. 33 

immediate needs. These are to a considerable extent 
paid for out of taxes on wealth which consists in nothing 
but expectations. Thus the demands of a future society 
render themselves effective in present time. Of course 
it is easy to point out cases in which what is here termed 
abstinence does no one any good. The mere speculator 
who invests his wealth in land and waits passively for 
it to increase in value is not thereby increasing the sum 
of social utility. But the capitalist who merely buys a 
share in an existing industrial corporation does no more. 
The wealth existed before he " abstained." The seller 
of the share, however, secures free wealth which he may 
employ in producing new capital goods. Thus the 
buyer of stock indirectly creates capital. In the same 
way the speculator sets wealth free when he buys land, 
and may indirectly create either new land or capital. 

Much as in the case of capital, a true social cost is 
connected with this form of individual cost. The labor 
and capital which are induced to engage in the develop- 
ment of a new country are diverted from the production 
of immediately available goods. Present satisfactions 
are sacrificed for the sake of the future. 

SEC. 15. Perhaps the most common distinction be- 
tween land and capital is based upon the alleged fact 
that the stock of capital is capable of indefinite increase, 
while the amount of land at the disposal of a community 
is absolutely fixed. As expressed by Professor Marshall, 1 

The stock of land in an old country at any time is the stock for 
all time, and when a manufacturer or cultivator decides to take in a 
little more land to his business, he decides in effect to take it away 
from some one else's business. 

This view has been so ably criticised by recent writers 

that its deficiencies need only to be outlined here. It is 

1 Principles of economics, p. 603. Cf. also Say, Treatise on political 
economy, p. 2, chap. ix. 
3 



34 America?! Economic Association. [912 

quite true that if "in an old country" industry has be- 
come static so far as the development of land is con- 
cerned, one man can add land to his business only by 
taking it away from another man's business. If capitaliza- 
tion has outlived the dynamic period, the same thing is 
true of capital. Even while capital is growing, one busi- 
ness ordinarily increases its capital by taking capital from 
another. The distinction evidently holds only in a 
society which has so far advanced that the quantity of 
effective land can not increase, while the quantity of 
capital may still become greater. 1 Professor Marshall 
admits that in a new country the stock of land may be 
materially increased. The extension of roads and canals 
has had this effect, since they have permitted waste lands 
to be utilized. The recent vast development of the 
means of transportation has virtually annexed enormous 
areas of land to the more settled portions of the world. 
All this everyone admits. But it is held that as soon as 
all the land in a country has been occupied and put to 
economic use, further increase in land is for that country 
impossible. If, however, it is to be accounted an in- 
crease in economic land when a tract of virgin territory 
is transformed into a cattle range, why should it not be 
considered a further increase when in consequence of the 
building of a railroad the same land is converted into 
fields ? To reply that there is no more land because the 
number of acres has remained the same would be much 
like declaring that there is no more capital in a steel 
rail than in an ingot because the number of pounds is 
unchanged. If we are to think of capital and labor in 
units of efficiency, we ought to treat land in the same 
way. The acre of laud which supports a highly inten- 
sive form of cultivation can not in any economic sense 

1 Clark, The distribution of wealth, p. 338 et seq. 



913] Land as an Independent Factor in Production. 35 

be considered as quantitatively equal to one which barely 
repays the most scanty outlay. Economically it counts 
for more land. From this point of view it is possible 
even in an old country to increase the quantity 1 of eco- 
nomic land ; and the quantity does actually increase, 
although the laws which govern that increase are quite 
unlike those that govern increase in capital. 2 

SEC. 16. The great majority of those who treat land 
as a separate factor in production define it with reference 
to one or another of the characteristics discussed above. 
None of these, as we have seen, possesses any great 
logical validity. Are we then to drop the terms " land " 
and "rent," or dissociate the name and the income, 
designating by the term " rent " one aspect of any con- 
crete income, 3 or total income regarded from the point 
of view of monopoly advantages, 4 while placing the in- 
come itself under profit 5 or interest 6 or even wages ? 7 It 
is merely a question of convenience. If there are im- 

1 Of course this does not mean that when land of the third quality, 
to use the familiar illustration, becomes necessary to meet the demand 
for food, and rent consequently rises on that of the first quality, we 
should consider that the good land now represents more units of 
economic land. If, however, an improvement in agriculture makes 
fields of the second quality as fertile as those that were formerly 
classed as of the first quality, or if improvements in transportation 
give free access to market to a tract classed with poor land on account 
of unfavorable situation, it may properly be said that the quantity of 
economic land at the disposal of society has been increased. And 
just as an increase in labor lowers the wages of each unit of labor, so 
what I have termed an increase in land would obviously lower the 
rent of each unit of land. 

2 For a more complete discussion of this and some other aspects of 
the same problem see Fetter, The passing of the old rent concept, 
Quarterly Journal of Economics, vol. xv. 

3 Clark, The distribution of wealth, p. 350. 

4 Patten, Theory of prosperity, p. 8. 

5 Patten, Theory of prosperity, p. 114. 

6 Clark, The distribution of wealth, p. 336. 

7 Patten, Theory of prosperity, p 121. 



36 American Economic Association. [9H 

portant economic laws which affect in a peculiar way a 
group of productive goods which practically coincides 
with what is ordinarily meant by land, there would seem 
to be good reason for retaining the old terminology, even 
if by so doing we run the risk of being classed with 
those who divide economic goods into the products of 
man and the gifts of nature, or with those who derive 
value from cost, or with the champions of other outlived 
notions. 

The most fundamental proposition in the theory of 
production and distribution is that with an increase in 
the number of units of any productive agent, if other 
things remain the same, there will be a decline in 
the productivity of each unit of that agent, measured 
in terms of goods created, and a still greater decline in 
value productivity (defining value as the power to pur- 
chase a given complex of goods). So far as the decline 
in productivity measured in goods is concerned, the 
cause of this is evidently the greater competition of the 
increased number of units for opportunity to combine 
with the complementary agents essential to production, 
and the consequent necessity of utilizing the inferior 
powers in such complementary agents. A similar cause 
lies at the bottom of the additional decline in value pro- 
ductivity ; for in an economy based upon exchange, each 
producing group is merely an element in the great com- 
plementary group which creates the social commodity, 
and the individual groups compete with each other for 
the most favorable combining positions. Any increase 
in that competition naturally results in a decline in 
income. 

This proposition may be merely formal, as when it is 
said that an increase in manufacturing capital without 
a corresponding increase in mercantile capital would 



915] Land as an Independent Factor in Production. 37 

mean a relative decline in the earnings of the former 
kind of capital. The statement is of course true, but 
the assumption is not real, because normally an increase 
would take place simultaneously in both branches. In 
order to account for an actual fall in the earnings of 
manufacturing capital, we should not care to investigate 
its relation with commercial capital, because we should 
know that the latter was suffering in the same way and 
from the same causes. If labor and capital were so re- 
lated that any increase in the one implied a parallel in- 
crease in the other, we could not explain any change in 
the rate of wages by reference to changes in the volume 
of capital. To make our assumptions real, it is neces- 
sary to treat as units all productive goods which are so 
related that their incomes increase or decline in conse- 
quence of the same causes. 

It has been amply demonstrated that there is no close 
connection between increase in capital and increase in 
labor, hence an examination of the effect of an in- 
crease in capital upon wages is something more than 
an exercise in logic. It is not a merely hypothetical 
truth that an increase in capital will raise wages. If 
wages rise, one would naturally infer an increase in 
the amount of capital available. This applies, however, 
only to general wages. An increase in unskilled labor 
might result in higher wages for skilled labor, pro- 
vided that the movement from one class to the other is 
sluggish. New capital may increase one form of capi- 
tal goods while leaving other forms unchanged in 
quantity. It may, therefore, be necessary to divide capi- 
tal and labor into several distinct groups if we are to 
have approximately satisfactory explanations of such 
rates of income as prevail in actual society. It does 
not, however, seem to be a straining of the truth to say 



38 American Economic Association. [916 

that in a reasonably long period the influences that tend 
to degrade one form of labor will also injure all other 
forms, and that a fall in the interest from one class of in- 
vestments in capital goods will eventually cause a de- 
cline in interest from all others. 

Economically available land is, as we have seen, quite 
capable of increase ; but an increase in capital does not 
usually imply a corresponding increase in land. An in- 
crease in land, on the other hand, may take place with- 
out any increase in capital which could be regarded as its 
cause. There have been many attempts to account for the 
fact that in spite of the enormous increase in the total 
capital of the western nations the rate of interest has 
rather increased during the past century than declined. 1 
Certainly the virtual annexation to civilized society of 
continents of land, due to improvements in transportation, 
is largely responsible for this apparently anomalous con- 
dition. At times the annexation of new land has un- 
questionably outrun the creation of new capital, and the 
rate of interest has risen ; at other times it has lagged 
behind. The important point is that increase has not 
uniformly affected both factors simultaneously. And the 
reason is not hard to find. The causes that have led to 
the development of new territory have been very different 
from those which have resulted in the steady growth of 
capital. Transportation agencies have been created for 
political as well as for economic reasons ; thus land has 
been annexed whether capital was overflowing or not. 
Another thing that has entered into the development of 
new countries is the spasmodic movement of population, 
and with this movement increase in capital has had 
little or nothing to do. We may therefore conclude that 
the laws governing an increase in capital are very dif- 

1 Nicholson, Principles of political economy, III, p. 139. 



917] Land as an Independent Factor in Production. 39 

ferent from those which govern an increase in land. It 
is accordingly justifiable to assume an increase in capital 
without an increase in land in order to explain a par- 
ticular rate of interest ; and except in a society in which 
neither land nor capital is increasing, or in which they 
happen to increase at the same rate, we must separate 
the two factors, and investigate their reciprocal rela- 
tions, as well as their joint relations with labor. 

If we attempt to classify the productive goods that 
from this point of view are to be called " land," we 
should in the first place include all agricultural land, 
whether " made land " or not, provided that by the crea- 
tion of irrigation works or of drainage ditches or similar 
improvements such land could not be very considerably 
increased without the expenditure of a proportionately 
greater quantity of energy and capital. We should also 
include building sites, so far as they could not be in- 
creased at practically "constant cost" in capital and labor. 
We should exclude all elements of fertility which are nor- 
mally destroyed and renewed ; for whether natural or 
artificial, a fall in interest would cause a corresponding 
decline in their earning power. We should include 
permanent improvements which can not be extended 
indefinitely without diminution in productiveness ; as, for 
example, ditches that drain limited bogs, embankments 
that prevent overflow, and the like. For even if these 
improvements could be reproduced at a lower cost, there 
is no occasion to increase their number, and therefore to 
diminish their productivity. We should also include so- 
called natural monopolies — mines, roadways possessing 
exclusive advantages — in short, every productive good 
except labor which normally increases in productivity 
simultaneously with a general fall of interest. And just 
as in considering the rate of interest on any particular 



4<d American Economic Association. [918 

form of capital it may be necessary to analyze capital 
into several classes of investments which are affected 
unequally by dynamic influences, so it may be necessary 
in the study of particular classes of rents to distinguish 
several rent-bearing categories. The influences which 
result in an increase in the agricultural lands at the dis- 
posal of society may be very different from those which 
bring new mines within reach. But in treating of the 
relation of land as a whole to capital and labor we may 
disregard such distinctions. 

Sec. 17. There is a further reason why it would seem 
to be expedient to keep land and capital distinct in eco- 
nomic theory. A great part of the significance of eco- 
nomic theory depends on the possibility of establishing 
units of productive agency independently of their actual 
product. We speak of the tendency of capital and labor 
to seek conditions of equalized productivity, of the de- 
cline or rise in interest or wages, of normal and ab- 
normal earnings. If we define our unit of productive 
agency as that quantity of productive goods which actu- 
ally creates a unit of value, all of these and similar 
propositions are either truisms or absurdities. 

It is customary to define as a unit of productive 
agency a quantity which will under assumed conditions 
produce a given value. 1 This implies that such a unit 
is physically determinable and recognizable under 
diverse conditions. Two laborers, engaged in unlike 
occupations, may be said to represent equal numbers of 
units of labor if they could change places without loss 
of productivity. This is of course a case of exaggerated 
simplicity. Yet there are in actual industry large num- 
bers of laborers who may be employed indifferently in 

1 Cf. Clark, The distribution of wealth, chap, xxiv — The ultimate 
standard. 



919] Land as an Independent Factor in Production. 41 

several occupations. When, however, two laborers are 
so specialized that it would be impossible for them to 
change places, a notion of their comparative efficiency 
may still be obtained if there are unspecialized laborers 
normally working with them who may serve as " com- 
mon denominators." Without the presence of such un- 
specialized laborers, it would be obviously impossible to 
reduce the various kinds of labor to units of efficiency 
which would be determined independently of their im- 
mediate value product. 

Artificial instruments of production are in the highest 
degree immobile. 1 They are designed for a single use, and 
rarely could one be found which would serve as a com- 
mon measure for two others of unlike kinds. The unit 
of capital must therefore be determined in some other 
way than by direct comparison of finished instruments. 
It is generally true that capital goods which are 
employed in the creation of ultimate utilities are the 
product of other goods that are less specialized. The 
material and labor that enter into the production of 
guns do not differ widely from those which are used in 
the manufacture of sewing machines. The amount of 
capital in the two forms of goods cannot be compared 
directly, but it is possible to compare the quantities of 
the practically homogenous productive agency that has 
entered into them, and thus we may obtain an indirect 
measure, correct only under perfect competition, of the 
capital in unlike instruments. 

If land is to be reduced to units of efficiency, it will 
have to be treated in the way in which we have treated 
labor. Land is highly mobile, 2 it successively enters 
into different employments ; and, moreover, land in 

1 Clark, The distribution of wealth, p. 118. 

2 Clark, The distribution of wealth, p. 298. 



42 America?i Economic Association. [920 

different occupations may frequently be compared by 
simple physical tests. Some forms of land are, indeed, 
of no value except for a single use. But there is almost 
always some economically mobile laud which is em- 
ployed in the same industry and which may serve as a 
measure of the efficiency of the immobile forms. 

If the several factors of production were each divided 
into non-competing groups, — if, for example, a hard and 
fast line could be drawn between skilled and unskilled 
labor, between city lots and farming land, between 
monopoly and competitive capital, — it would be meaning- 
less to speak of units of labor as a whole, or of capital 
or land. If skilled labor produced the same amount of 
wealth as unskilled labor, it would yet be without sig- 
nificance to affirm that there were the same number of 
units of each kind, since no other common measure than 
their actual value product would exist. We might, in- 
deed, so define our unit as to make the products of units 
of both kinds the same, but any dynamic change that 
could occur would in all probability affect units of 
different kinds in different degrees. The only way to 
restore the former equality would be to reapportion the 
units of one kind or the other, a procedure suspiciously 
like forcing scientific results. It would probably be 
better under such circumstances to make six factors of 
production instead of three. There is nothing sacred 
about the traditional threefold division of the science. 
But the facts of competition through margins are per- 
haps numerous enough to justify the retention of the 
simpler classification. 

There is, however, reason why land should be treated 
as distinct from capital Capital does, indeed, compete 
with land, but only as labor competes with land. The 
primary relation of capital to land is cooperative, not 



92 1] Land as an Independent Factor in Production. 43 

competitive. As we have seen, an increase in capital 
normally increases the productivity of land. If we are 
to call land capital, and divide it into units which shall 
be equal in productivity to other units of capital, we 
should need after each dynamic change a new appor- 
tionment of units, a species of theoretical stock-watering 
the utility of which is not apparent. 

It may be said that in classifying with land mines and 
monopoly situation I have committed myself to a posi- 
tion not differing in nature from that of those who classify 
land with capital. To this charge I hasten to plead guilty. 
There is no way of equating mines to agricultural land 
except in terms of value productivity. There are no 
margins between the two forms of agency. My defense 
is that the dynamic influences which increase our con- 
trol over minerals are more similar to those which 
govern increase in land than to those which are re- 
sponsible for an increase in capital, and that an increase 
m capital or of labor affects both alike. For the sake of 
economy in thought, it is best to make only as many dis. 
tinctions as are necessary for the solution of the problems 
at hand. In a study of the static laws of income, there is 
no reason for a distinction between land and capital. In 
a study of the most general dynamic influences, it is 
useful, I believe, to distinguish three factors in produc- 
tion. In a more detailed dynamic study, it would prob- 
ably be necessary to divide each factor into as many 
classes as can for any length of time stand in a comple- 
mentary, rather than a competitive relation with each 
other. 

Sec. 18. Land, then, we shall treat as a separate 
factor in production. We can not distinguish land from 
capital on the ground that it is not made by labor, for 
labor adds utilities to land, and does no more in the case 



44 American Econoynic Association. [922 

of any other commodity. We shall not abstract from 
land all qualities that can possibly be due to labor, 
because by so doing we should have to apply the term 
land to something which is not economic at all. Nor is 
it possible to distinguish between land and capital on a 
basis of their relations to cost. Land has a cost which 
under free competition would equal its value, just as the 
value of capital under free competition equals the cost of 
production. When industry is dynamic, the unqualified 
law of cost governs the value of neither capital nor land. 

What appears to be, on the whole, the clearest distinc- 
tion between land and capital, that the quantity of land 
is fixed for all time, while the quantity of capital may 
increase, proves on examination to involve a confusion 
of economic with geographic land. The surface of the 
world is indeed permanently fixed, but the part which is 
accessible to man changes in magnitude. It is the latter 
alone which has significance in economics. Economic 
land is subject to increase, and so does not differ from 
labor and capital in this respect. 

But the laws which govern the increase of land are 
not identical with those which cause capital to increase : 
consequently, when interest is rising, rent may fall ; in- 
deed, it would probably do so. Rents may rise in a pe- 
riod of falling interest. Accordingly, if it is desired to 
account for a change in the rate of interest, it is necessary 
to contrast land with capital, and to examine their recip- 
rocal quantitative relations. We distinguish between 
capital and land, then, on the ground that such a dis- 
tinction throws light upon changes in income and in 
prices, the fundamental phenomena with which economic 
theory has to deal. 

By the term rent we shall designate the income which 
the owner of land actually receives. That income would, 



923] Land as an Independent Factor in Production. 45 

under perfect competition, equal the part of the product 
of industry which the land specifically produces. It 
may, perhaps, be convenient to designate as the " rent 
fund " what the land actually produces, whether the 
present laws of distribution give it to the landowner or 
not. That rent, so defined, is an independent form of 
income follows from the fact that land is an independent 
factor in production. It is necessary now to consider 
whether rent as a whole is to be classed with interest 
and wages on the one hand, or with profits and monop- 
oly gain on the other. It is hardly necessary to de- 
fine wages and interest. The actual incomes of the la- 
borer and capitalist are generally here called wages and 
interest. There is a wages fund and an interest fund, 
consisting in the theoretical product of labor and of capi- 
tal respectively. Profits and monopoly return may be 
left for later definition. 



CHAPTER III. 

RENT AS UNEARNED OR EXPLOITATIVE INCOME. 

SEC. 19. Economic science deals with the ordinary 
phenomena of business life, and receives its conceptions 
originally from popular thought. At first it accepted 
uncritically the categories of common sense. Where 
the business man saw a distinction between phenomena, 
the economist was inclined to discover one. Eventually 
it became necessary to supplement the grounds upon 
which the distinction had originally been based by new 
ones of a purely theoretical nature. Accordingly we 
find in current conceptions elements derived from pop- 
ular thought and elements due to theoretical analysis. 
Thus it is customary to characterize the rent of land as 
an unearned or exploitative income, as did those who 
wrote before the development of economic theory, or who 
have remained uninfluenced by it, and as differential or 
residual, as only an economist would do. This is not 
necessarily illegitimate. It is possible that both com- 
mon sense and theory may have contributed elements 
essential to a satisfactory conception. It will, however, 
be convenient to keep the two sets of characteristics dis- 
tinct and to study each separately. 

In the popular view, the distinguishing quality of 
ground rent is that it is unearned, that it is par excel- 
lence the income which is secured not by virtue of any 
useful activity, but through social, political, or legal 
privileges. The facts of land appropriation lend color 
to such a view. Everywhere history or tradition recalls 
a time when " the whole product of labor was the la- 
borer's." Nothing could be more natural than that a 
condition in which land yields a rent should be accounted 



925] Rent as Unearned or Exploitative Income. 47 

for as a result of the gradual subjection of the masses to 
favored classes who were shrewd enough to secure a part 
of the social income without producing anything. And 
this view has frequently been reflected in economic writ- 
ings, from the slur which Adam Smith cast upon the 
landlords, who " love to reap where they never sowed," 
to the vociferous declamations of Henry George and his 
disciples. 

In order to establish a distinction between earned and 
unearned incomes, it is essential that the meaning of the 
word " to earn " should be perfectly definite. An in- 
come is earned when a certain relation exists between 
the merit of the recipient and his reward. But what is 
the test of merit in economic conduct, and what is the 
proper relation it should bear to reward ? To undergo 
fatigue and pain for the sake of producing economic 
goods is recognized to be economically meritorious. It 
is safe to afiinn that the majority of those who write 
on economics still consider disutility to be the common 
characteristic of all forms of labor, and hold that it con- 
stitutes an ideally just basis for the distribution of 
the social income. Pain is regarded as the original price 
for which goods are purchased from nature, and it seems 
just that the price should be equal to all. In this view 
it is evident that any excess over that income which bears 
the normal or average relation to pain would be unearned. 
If abstinence is regarded as a " pain," a part of interest 
is earned, a part unearned, according as capital is saved 
at normal or less than normal sacrifice. As has been 
pointed out in the preceding chapter, abstinence con- 
nects itself with the appropriation and ownership of land 
as well as with the formation and holding of capital ; ac- 
cordingly rent would be partly earned, partly unearned. 
Just as it is clear that the same thing is true of interest, 



48 American Economic Association. [926 

so it is true of wages. If it is assumed that just wages 
are such as exactly cover pain-cost, there is almost always 
a surplus which is not earned. If it is held that shares 
in the surplus of satisfaction created by society should 
be proportionate to the pains incurred in production, the 
large number of workers who produce at low subjective 
costs and who secure high rewards receive an unearned 
income. On the basis of pain-cost, then, there is no 
ground for distinguishing rent as a whole from wages 
and interest treated as wholes. The unearned portion 
of the social income includes a part of rent, but it also 
includes a part of wages and interest. 

SEC. 20. At a time when economic thought was domi- 
nated by utilitarian ideas, it was natural that emphasis 
should be laid upon the relation between the pains in- 
volved in production and the reward derived from it. 
Modern economics is subjected to wholly different philo- 
sophical influences. The ideal distribution which most 
nearly meets the requirements of modern thought is that 
which favors the survival of the individual and of society. 
Society should so distribute its wealth as to encourage 
the growth of the classes which are most useful to it- 
self. And these do not consist in those who produce at 
the greatest pain. The man who can create a great 
deal of wealth without finding labor disagreeable is of 
more importance to society than the one who creates 
little and with great difficulty. Accordingly, if incomes 
are assigned according to productivity, the survival power 
of society is increased ; if they are assigned according 
to subjective cost, society is encumbered with the unfit. 
Productivity thus comes to be considered the most ex- 
pedient, and therefore the most just basis of distribution. 
Incomes that correspond with productivity come natur- 
ally to be regarded as earned. 



927] Rent as Unearned or Exploitative Income. 49 

This change in the point of view has been hastened 
by the fact that a great deal of the labor of modern in- 
dustry is not only not disagreeable, but affords some of 
the most substantial of the pleasures of life. The 
claim has recently been advanced that pleasure is the 
normal concomitant of all kinds of work. 1 The position 
is, no doubt, extreme, but it is probably nearer the truth 
than its opposite, that labor and pain are inevitably as- 
sociated. Now it would not be denied that pleasurable 
work is more meritorious than the activities of play. Ac- 
cordingly, even those who would be inclined to defend 
the claim that there should be some fixed ratio between 
pain and recompense would have to admit that as be- 
tween purely pleasurable kinds of labor, productivity is 
the most satisfactory test of merit. 

By this test great disproportion in incomes, or in the 
relation of reward to subjective cost, does not indicate 
the presence of unearned income. In the existing state 
of society, laborers are, of course, not rewarded exactly 
in proportion to their productivity, and therefore an un- 
earned element may appear in wages. Yet there is a 
recognized tendency to eliminate this element. Wages 
may therefore be regarded as essentially an " earned " 
income. 

The question remains whether interest and rent are 
earned or not. We may waive for the present the ques- 
tion whether capital and land are productive in the 
same sense in which labor is productive. Certainly 
they have a worth to society analogous to that of labor. 
But that does not make the income which the owner 
of land or of capital receives an earned income ; nor do 
the political and social considerations so often employed 

1 Patten, Theory of prosperity, p. 29 et seq. 
4 



50 American Economic Associatioii. [928 

in the defense of private possession of such goods indi- 
cate that income from them is ethically based on the 
same principle as income from labor. 

Granting that it is possible to determine exactly how 
much a man's land or capital contributes, his ethical 
claim to the enjoyment of that contribution does not 
necessarily stand on the same footing as does the claim of 
the laborer to his specific product. It is first necessary 
to determine how productive goods came into private 
possession. If they have been acquired in the same 
method in which wages are earned, we may, perhaps, 
acquiesce in calling the income from them "earned." 
From this particular point of view, no one would care to 
distinguish between the product created by a tool which 
a laborer makes for his own use and the immediate pro- 
duct of his toil. It would, however, be natural to dis- 
tinguish between the product of an implement acquired 
by force or fraud, by inheritance or happy chance, and 
the product of unaided labor. 

The typical capitalist, indeed, does not make, but buys 
his capital goods. That he turns into capital the wealth 
which he could have wasted in riotous living is no doubt 
an advantage to society, but it obviously proves nothing 
as to whether his income is earned or not. That de- 
pends on the method in which the money or wealth 
which he exchanged for capital was acquired. If that 
wealth was secured through unfair advantages, the per- 
manent income is also unfair ; if it was due to chance, 
the income from it must be classed with chance incomes, 
and must be justified as they are. 

In exactly the same way the income that the pur- 
chaser of land secures is earned or unearned according 
to the circumstances attending the acquisition of the 
wealth with which the land was purchased. Land was 



929] Rent as Unearned or Exploitative Income. 51 

originally acquired largely through favoritism ; its value 
has frequently been enormously increased by unforeseen 
movements of population. Thus it has often served to 
turn unfair or chance incomes into the hands of favored 
or lucky individuals. Even at present it is a familiar 
fact that there is much irregularity in the valuation of 
land, owing to sentimental considerations which influ- 
ence both buyer and seller, and owing to the fact that 
the nature of land deprives it of the benefit of market 
laws. Nevertheless, in this respect land differs from 
other producers' goods merely in degree, and the de- 
gree is hardly sufficiently marked to justify a distinction 
between rent as a whole and interest. 

It may be said that by the same test the dividends 
from common stock in a monopolistic corporation might 
be an earned income. And that is quite true. When a 
man has purchased in the open market a share of stock, 
paying for it out of his wages or other legitimately ac- 
quired wealth, it would be absurd to say that the income 
he secures from it is unearned, even though the stock 
was first put upon the market by a speculator who may 
have performed no social service. Theft does not ad- 
here to a coin that has once been stolen. The terms 
" earned " and " unearned " express relations between 
incomes or sources of income and the particular individ- 
uals who possess them. They do not designate qualities 
that inhere in particular sources of income and that are 
therefore transferable. 

SEC. 21. It has long been observed that the income 
which the possessor of an economic agent receives may 
be distinguished into two parts, one of which is abso- 
lutely necessary if the services of the agent are to be 
secured, while the other may be withheld without affect- 
ing production. A laborer may receive three dollars a 



52 American Economic Association. [930 

day, although he would rather work for one dollar than re- 
main idle. He would not work for less than one under 
any consideration. The one dollar, then, is the wage 
which is strictly necessary to make the labor of this par- 
ticular workman forthcoming. Interest may likewise 
be analyzed into these two elements. This distinction 
has by some writers been identified with the distinction 
between earned and unearned income. One economist 
says, 

It is easy to see that in many cases individuals obtain for their capi- 
tal more than is necessary to make it forthcoming or available. 
Thus we reach the conclusion that in interest, as in economic rent, 
there is an unearned element. 1 

This view is manifestly derived from the notion that 
land rent is the type of unearned incomes. Wages and 
interest as private incomes could not wholly disappear 
without crippling industry, while the volume and direc- 
tion of industry would not necessarily be changed if no 
private individual received an income from the soil. 
The whole of rents, it is said, might theoretically be 
taken by taxation without limiting or changing the em- 
ployment of land, while only a fraction of wages and in- 
terest could be thus appropriated to the state without 
affecting industry. 

It is obvious that it is unjustifiable to designate 
as unearned that part of a man's income which he 
would sacrifice if the alternative were to lose his em- 
ployment. There are a great many laborers who are so 
specialized that they can earn their living in only one 
occupation. A fall in their wages, so long as it does not 
impair their control over the needs of existence, would 
not necessarily, or even probably, cause them to work 
less diligently. The difference between the income that 

1 Nicholson, Principles of political economy, III, p. 232. 



93 J ] Rent as Unearned or Exploitative Income. 53 

a specialized laborer actually receives and the minimum 
which he could be forced to take is necessarily greater 
than the difference between the actual and the minimum 
wage of the laborer to whom alternative employments 
are open. It would, however, be absurd to say that the 
latter workman earns a greater proportion of his income 
than the former. In like manner the capitalist who has 
invested in fixed forms of property might accept a very 
low rate of interest, since otherwise he would receive 
no interest at all, while the one whose capital consists in 
short-period investments would be able to demand a 
fairly steady return. Clearly the one does not earn his 
income any more than the other does. 

Sec. 22. But though we repudiate the identification 
of necessary with earned incomes, we may consider the 
question whether the income of land may as a whole be 
treated as an income which is not necessary to produc- 
tion, while the incomes of labor and capital are necessary. 
If labor were perfectly mobile, it is evident that the act- 
ual wage that a laborer receives would be the minimum 
that he would take. Absolute mobility implies the 
power to migrate from an industry without loss in pro- 
ductive power ; accordingly, if wages were reduced in 
one branch, laborers would migrate until scarcity of labor 
restored wages again. If capital were quite mobile, it is 
obvious that its entire natural income would at all times 
be necessary to secure its employment in any industry. 
If, however, land were quite mobile, no landowner 
would consent to take a smaller rent than the maximum 
that could be paid — the whole product of the soil. 1 

1 It may be said that no degree of mobility could make rent a neces- 
sary income unless private ownership of land exists. But private 
ownership is always assumed when we speak of the mobility of capi- 
tal, therefore it may fairly be assumed when the mobility of land is 
under discussion. 



54 American Economic Association. [93 2 

If instead of considering the effect of a reduc- 
tion of rent in a single branch of production, we 
consider the effect of a reduction of rents in all in- 
dustries, we see that rent as a private income is 
not really necessary to production. So long as rent 
was reduced in a single industry, the landowner could 
put his land to another employment. Under the 
present hypothesis, nothing would be gained by so 
doing. The loss in income would be inevitable. If in 
like manner we assume a reduction of wages in all in- 
dustries, production would not necessarily be affected un- 
less the means of subsistence were impaired. Exactly 
how great a reduction wages would stand it is impossi- 
ble to say. Yet we may be sure that total wages could 
be considerably reduced without affecting production. 
The same is true of interest. The capitalist who has al- 
ternative uses for his capital has the power of fixing a 
minimum far above what he would take if he had no 
better alternative. 1 

To return to realities, we find that it is the power of 
the owner of a form of productive agency to withdraw 
it from one employment and to make use of it in another 
that actually determines the distinction between the nec- 
essary and unnecessary parts of the income derived from 
it. There are, indeed, forms of land so immobile that 
their rent could be reduced to practically nothing with- 

1 The immediate effect of the fall in income assumed in the text 
would doubtless be a diminution in production. Laborers would feel 
aggrieved and would refuse to work, or would work with diminished 
zeal ; capitalists would be less inclined to keep their stock intact ; 
landlords would let some of their fields lie fallow. But if the low re- 
turn continued long enough to establish lower standards, the former 
volume of production would very probably be restored. At all 
events, the change would be insignificant as compared with that which 
takes place in a single industry when the return to mobile agents is 
abnormally lowered. 



933] Rent as Unearned or Exploitative Income. 55 

out lessening the amount of service which they perform ; 
and this is true, only in less degree, of labor and capital 
of certain kinds. The real distinction, then, is not be- 
tween rent as a* whole and wages and interest in their 
entirety, but between the incomes of the immobile and 
the mobile forms of productive agency, whether land, 
labor, or capital. 

/" SEC. 23. An unearned income is not necessarily an 
unjust one. There are many forms of income which 
can not in any sense be said to be earned by their re- 
cipients, which are yet socially expedient and are recog- 
nized by the popular consciousness to be perfectly just. 
Such, for example, are gifts, bequests, and inheritances, 
as well as ordinary chance increments to normal income 
in which all who have sufficient enterprise and good for- 
tune may share. Numerous economic writers, while 
agreeing that rent is unearned, have defended it as they 
defend these types of abnormal income. There is, how- 
ever, a large class of writers who regard rent as a sub- 
traction from the incomes either of the laborer and the 
capitalist or from that of the consumer, and hence as an 
exploitative income. And with the characteristic loose- 
ness of a popular science, it is now the consumer who is 
thought of as the one who endures the entire wrong, 
while now the laborer and capitalist are regarded as the 
only parties aggrieved. As one would expect, Adam 
Smith advocates both views quite impartially. 

As soon as land becomes private property the landlord demands a 
share of almost all the produce which the laborer can either raise or 
collect from it. His rent makes the first deduction from the produce 
of the labor' which is employed upon land. 1 

Quite clearly it is here the laborer who is exploited. 
But elsewhere, while the laborer is indeed thought of as 
1 Wealth of nations, I, chap. viii. 



56 American Economic Association. [934 

the victim of exploitation, it is in his capacity as a con- 
sumer. 

The wood of the forest, the grass of the field, and all the natural 
fruits of the earth, which, when land was in common, cost the laborer 
only the trouble of gathering them, come, even to him, to have an 
additional price fixed upon them. 1 

The most familiar presentation of the former concep- 
tion, as an explicit charge of exploitation, is that of 
Henry George : 

Thus rent or land value does not arise from the productiveness or 
utility of land. It in no wise represents any help or advantage given 
to production, but simply the power of securing apart of the results 
of production. 2 

One of the most common methods of presenting the 
law of rent, while not explicitly designed to show that 
the laborer and the capitalist are exploited, does never- 
theless convey that implication. If labor and capital, it 
is said, are applied to land in successive " doses, " the 
later doses are less productive than the earlier. The 
employer need not pay more for any dose than he pays 
for the last one. In Von Thiinen's example 3 the earlier 
units of labor engaged in gathering potatoes create a 
large product ; as additional units are employed, and it 
is necessary to dig and rake the soil more carefully, a 
much smaller product is created. The last laborer gets 
what he gathers only with great difficulty ; the earlier 
laborers can get no more. The appearance of an addi- 
tional workman is thus a signal to the employer to cut 
the wages of all the rest, and the profit thus secured is 
soon conveyed to the landlord and becomes a part of 
the permanent rent. If we place ourselves in imagina- 
tion at the time when land was, for all practical pur- 
poses, unlimited, and observe the development of landed 

1 Smith, Wealth of nations, I, chap. vi. 

2 Progress and poverty, p. 149. 
s Der isolirte Staat, 2te Aufl., II, 175. 



935] Rent as Unearned or Exploitative hicome. 57 

property and rent, it appears that the entire rent is made 
up of increments transferred from wages and interest, first 
to the entrepreneur, and later to the landlord. 

It may be said that such a transfer of income is inevi- 
table in a competitive society ; that it would be bad 
business, philanthropy, for the landlord to forego the 
advantages which the misfortunes of the other factors 
place in his power. But if rent can be truly described 
as peculiarly a transferred income, such a defence is 
merely a reflection upon the ethics of business. If, on 
the other hand, land becomes more productive upon the 
appearance of additional labor and capital, it is not nec- 
essarily an act of exploitation which gives the landlord 
a greater rent. If labor and capital become less produc- 
tive when their quantity increases, they are not robbed 
because their incomes are reduced ; and though the rent 
of land is increased at the same time that' the return to 
the other factors is diminished, we should regard the 
changes as merely the effects of causes working simulta- 
neously, not as the transfer of income from one factor to 
the other. There are certain considerations that make 
such a view reasonable. Is not land which is at present 
cultivated intensively of greater social utility, of greater 
productivity, than it was when merely skimmed by ex- 
tensive cultivation ? And is not capital, when scarce, 
more productive than it would be if it were approaching 
a condition of superfluity ? These questions can be an- 
swered only by an analysis of what is fundamental in 
our notions of productivity. 

SEC. 24. In primitive industrial conditions, it is safe 
to affirm, productivity was predicated of labor alone. 
The artisan regarded himself as the sole cause of the 
goods that issued from his hands. The idea that the 
tools with which he worked, the materials which he em- 



58 America?i Economic Association. [936 

ployed, were jointly productive with himself would have 
seemed utterly absurd to him. He recognized them as 
conditions essential to production, but as nothing more. 
If he owned the tools and materials, he regarded the 
commodities which he created by their aid as the pure 
product of his exertion. If he had to rent his tools and 
pay interest on the capital invested in materials, he re- 
garded the payment as a deduction from his wages, a 
necessary deduction, to be sure, and compensated by the 
advantages of use, just as a modern day-laborer, mulcted 
by the " padrone," regards his assessment as a deduction 
from wages, compensated by sufficient advantages. That 
this was once a common view is amply attested by the 
fact that among backward social classes, as, for example, 
immigrant handicraftsmen and even farmers, a like view 
prevails to-day. 

But even in primitive industry there must have been 
laborers who were not employed directly upon the com- 
modity, but whose presence was nevertheless necessary 
for production, as, for example, those engaged in di- 
rective and protective labor. Even at a time when its 
importance was recognized, such labor has been termed 
" unproductive." The " productive " labor of Adam 
Smith was obviously that which changed directly 
the form of materials. With the advent of machinery, 
however, the laborer ceases to be even in seeming the 
sole cause of the changes which the material under- 
goes. It would be illogical to affirm productivity of 
the smith who forges nails without affirming it of 
the machine which performs the identical operation. 
Still less natural would it be to call productive the 
labor of a man who merely watches a complex ma- 
chine, while defining as unproductive that labor 
which, is engaged in organizing and directing other 



937] Rent as Unearned or Exploitative Income. 59 

labor. An increasingly large proportion of total labor 
is held aloof from physical contact with the commodi- 
ties produced ; it is nevertheless indispensable to pro- 
duction. The quality of indispensability occupies the 
economic position once held by the act of imparting 
utility directly by muscular exertion. If productivity 
is to be a term of any significance in modern science, it 
must be used to connote economic importance and noth- 
ing else. The labor of the loom-tender is productive, 
but so also is that of the foreman and the night-watch- 
man. The loom is productive, but so also is the yarn, 
and so are the bricks of the factory chimney. In this 
sense the ground on which the factory stands is obvi- 
ously productive. 

Not only can productivity be affirmed of capital and 
land, but its precise degree is ascertainable. Just as the 
importance of any unit of consumers' goods can be 
found by measuring the satisfactions depending upon it, 
so the importance of any unit of producers' goods can 
be determined by computing the loss in consumers' 
goods that would result if it were withdrawn from pro- 
duction. To test the true importance of a unit of pro- 
ducers' goods of any kind, all that it is necessary to do 
is to withdraw that unit, and after making the best pos- 
sible rearrangement of complementary agents, to deter- 
mine the loss in productivity. It is clear that produc- 
tivity in this, the only natural sense, is a marginal 
quality. Interchangeable units of productive agency 
have a like economic importance. " Marginal produc- 
tivity " is a redundant expression, since there is no 
intra-marginal productivity which exceeds that of the 
margin. True, if the capital in the power wheel of a 
mill were destroyed and could not be replaced the loss 
would be very much greater than the loss which would 



60 America?i Economic Associatio?i. [938 

result from the destruction of raw material representing 
an equal amount of capital. That would be true, how- 
ever, not because a unit of capital of great " total pro- 
ductivity " had been destroyed, but because all the re- 
maining capital of the mill would be sterilized. 
" Total " or " intra-marginal " productivity results from 
the imputation to one factor of the products of comple- 
mentary factors. 1 

Productivity, in the sense of the effective importance 
of a producers' good, is obviously no absolute quality of 
that good, but varies according to its economic 
relations. And the most essential factor in deter- 
mining productivity is the sufficiency or insufficiency of 
complementary agents, without which producers' goods 
are of no importance at all. The productivity of labor 
changes with every change in the quantity of capital 
and land upon which it is employed, and this by virtue 
of no change in the operations performed by labor. 2 
Land likewise varies in productivity with every change 
in its quantitative relations with labor and capital. 

When a producers' good is for practical purposes un- 
limited, its productivity is nil. As goods which are to 
it complementary increase in quantity, it becomes rela- 
tively limited, and is endowed with productivity, and 
with each increase in the quantity of complementary 
agents its productivity increases. In the nature of the 
case such a change is at the same time the cause of a 
decline in the productivity of the complementary agents 
— not simply a decline in marginal productivity, but a 
decline in productivity in general. To speak of the pro- 
ductivity of earlier units as unchanged is to mistake 
certain movements, applications of mechanical force and 

1 Wieser, Natural value, 83 et seq. 

2 But cf. Loria, Analisi, I, 39 et seq. 



939] Rent as Unearned or Exploitative Income. 61 

of chemical or vital processes which may or may not have 
economic importance, for relations that are purely eco- 
nomical. Economically, the productivity of labor and 
of land change simultaneously. There is no transfer 
from one to the other. 1 

Few have found difficulty in comprehending the fact 
that when the quantity of available land is extended, 
labor becomes more productive. Yet such an extension 
of the area of economic land normally means a fall in 
rents, until population again reaches a condition, rela- 
tively to land, similar to that which existed before the 
increase in land. Obviously, if the productivity of land 
is defined with reference merely to its absolute powers 
of supporting vegetable life, immediately after each in- 
crease land is exploited in favor of the laborer. 

The facts of economic history give a semblance of 
reality to the assumption of unlimited, and therefore 
unproductive land, while unlimited capital or labor is 
inconceivable. It is accordingly easier to conceive of 
the whole of rent as transferred from labor and capital 
than to conceive of wages and interest as the trans- 
ferred income of land. But that part of wages which 
exceeds the subsistence minimum may be so conceived, 
and must be so conceived in certain analyses of the 
nature of economic productivity. 2 The conception that 
any income can be treated as primarily a transferred 
income is, however, theoretically inexcusable. It is 
based upon a vague notion of physical productivity 
which can have no standing in economics. It would be 
absurd to attempt to distinguish between a part of the 
total product which is physically due to labor alone ; it 
is likewise absurd to affirm that the pure physical pro- 

1 Supra, chap, i, sec. 8. 

2 Clark, Distribution of wealth, passim. 



62 American Economic Association. [940 

duct of labor changes, or that it remains stationary 
under changing complementary relations. Economic 
productivity certainly does change with changes in the 
quantitative relations of productive goods. 

In this connection it may be worth while to touch 
upon the notion that the income from land has a 
peculiar dependence upon the law of diminishing re- 
turns. It has been said that rent is not due to the 
fertility of the land, but arises because land yields 
diminishing returns to labor and capital employed upon 
it. 1 It has been shown that a fixed amount of labor 
yields diminishing returns to successive units of capital 
and land combined with it; and that the corresponding 
fact is true of a fixed amount of capital. 2 Were this not 
true, neither labor nor capital would be an economic 
agent. Diminishing or limited returns to increasing 
quantities of complementary agents are, of course, 
essential to the productivity of any agent. They play 
the part that limitation plays in the valuation of a 
consumers' good. 

Sec. 25. The view that rent is an income trans- 
ferred from the consumer to the landlord was especially 
common among the older economists, and still survives. 
It is most clearly stated by Sismondi, Buchanan, and 
Ricardo. 

It is the only part of the product of labor of which the value is 
purely nominal, devoid of reality. It is, in fact, the result of the 
augmentation in price which a seller obtains by virtue of his priv- 
ileges, without which the commodity would really be worth more. 3 

The high price in which the rent or net surplus originates, while it 
enriches the landlord, who has the produce of agriculture to sell, 

1 Ricardo, Political economy, 63. 

-Clark, Distribution of wealth, passim ; also, Hobson, The law of 
the three rents, Quarterly Journal of Economics, V, 270. 

3 Sismondi, De la richesse commerciale (cited by Malthus, Political 
economy, 138). 



941] Rent as Unearned or Exploitative Income. 63 

diminishes, in the same proportion, the wealth of those who are its 
purchasers, and on this account it is quite inaccurate to consider the 
landlord's rent as a clear addition to the national wealth.' 

It must then be admitted that Mr. Sismondi and Mr. Buchanan, for 
both their opinions are substantially the same, were correct when they 
considered rent as a value purely nominal, and as forming no addi- 
tion to the national wealth, but merely as a transfer of value, advan- 
tageous only to the landlords and proportionably injurious to the 
consumer. 2 

The same view appears sometimes in a slightly different 
form : " Rent, then, is a creation of value, but not a 
creation of wealth ; it adds nothing to the resources of a 



it 3 



country. 

We have here another example of that prejudiced 
logic which persists in regarding rent from one point of 
view, wages and interest from another. 4 As a money 
income, paid by the business undertaker to the land- 
lord, and in the last analysis paid by the consumer, rent 
is, of course, no net addition to the wealth of a com- 
munity. The goods that pass into the hands of the 
landlord existed before in the possession of the buyer of 
agricultural produce. But wages and interest, as money 
incomes, represent merely the transfer of wealth that is 
already in existence, and constitute no net increase in 
the social wealth. If, however, by wages and interest 
we mean not the money incomes which are usually 
designated by those terms, but the specific product in 
concrete goods that labor and capital produce, regarding 

Buchanan, cited by Malthus, 139. 

2 Ricardo, Works, McCulloch's ed., p. 244. 

3 Ricardo, Works, McCulloch's ed., p. 244. Practically the same 
idea appears even in modern economics. Thus we have the state- 
ment of Professor Carver that " the amount of rent, as I understand 
it, is the excess of the profitableness of the industry over the product- 
iveness of the industry." Publications of the American Economic 
Association, Papers and proceedings of the fourteenth annual meet- 
ing, 198. 

4 Roscher, Political economy, Lalor, ed. p. 32. 



6-j. Americayi Economic Associatio?i. [94 2 

the receiving of money wages as a mere exchange of 
goods for goods, wages and interest are indeed net addi- 
tions to the wealth of a community. Land, as has been 
pointed out, is also productive ; and the primary form 
in which rent appears is as the specific product of the 
land — clearly a net addition to social wealth. In the 
sense, then, in which rent is not an additition to wealth, 
wages and interest are not ; in the sense in which wages 
and interest augment the national wealth, rent does 
also. 1 The flow of goods from which all increase in the 
wealth of society is derived appears under economic 
analysis to consist in the products of land and the 
products of labor and capital ; in rent, wages, and 
interest alike. 

1 Clark, The distribution of wealth, chaps, xxii, xxiii. 



CHAPTER IV. 

RENT AS A DIFFERENTIAL OR RESIDUAL INCOME. 

SEC. 26. Most of the views that were considered in 
the preceding chapter conveyed, explicitly or implicitly, 
the notion that there is an ethical distinction between 
rent on the one hand and the return to labor and 
capital on the other. Scientific writers, however, have 
often tried to avoid introducing ethical ideas into 
economic discussions, and have attempted to distinguish 
rent from wages and interest by reference to purely 
economic characteristics. This they have usually done 
by describing rent as a differential or as a residual in- 
come. Units of labor and of capital, it is claimed, yield 
equal incomes ; units of land vary in their productivity. 
Moreover, there is a certain uniformity in the return 
which labor and capital receive at different periods, 
while the return to land shows the widest possible 
rano-e of variation. The rent of land may, therefore, be 
described as differential, whether we compare the pro- 
ductivity of different units at the same period of time, 
or the productivity of the same unit at different times. 
Since there appears to be this uniformity in the 
return to labor and capital, while the return to land 
varies so greatly, it is thought to be most convenient, in 
the theory of distribution, to establish directly the laws 
that determine the productivity of labor and capital, 
leaving rent to be indirectly determined. Whatever 
is produced above the normal return to labor and capital 
will be rent or something similar to it in nature. Rent 
may, therefore, be best treated as a residuum. It is to be 
noted that the view of rent as a differential is funda- 
5 



66 American Economic Association. [944 

mental, since it attempts to describe the essential nature 
of the income ; while the description of rent as a re- 
sidual is,merely a matter of convenience in theory. 

We may take Walker's statement as fairly representa- 
tive of this view : 

Rent arises from the fact of varying degrees of productivness in the 
lands actually contributing to the supply of the same market, the 
least productive land paying no rent, or a rent so small that it maybe 
treated as none. 1 

Stated thus, there is a very old and very obvious objec- 
tion which will bear repetition. In the classical illustra- 
tion, it is when lands of the second grade of fertility 
are brought under cultivation that lands of the first 
grade begin to 'yield a rent. With certain reservations 
we may admit this, and vet deny that it is because of 
the employment of lands of the second grade that rent 
emerges on the better lands. When the demand for the 
products of the soil increases, the share of the produce 
which the landowner can exact becomes greater at once, 
quite without regard to the extension of cultivation to 
the poorer grade. This becomes clear if we assume that 
there is an appreciable difference between the two grades 
of land. Prices will have to rise considerably before 
the poorer land can be employed, and since according to 
the usual assumption the laborer and the capitalist can 
get no greater returns than before, the landowner must 
necessarily receive an increase in rent. 

If we prefer the other common form of statement of the 
same "law," namely, that rent is due to the differences 
in the productiveness of the several powers of a given 
piece of land, we find that the same objection holds. 
The first " power" yields a rent, not because the second 
power is called into use, but quite independently of that 

1 Walker, Land and its rent, p. 21. Cf. also Macfarlane, Value and 
distribution, p. 87. 



945] Rent as a Differential or Residual Income. 67 

fact. The method of illustration just employed shows 
that it is not only possible that rent should emerge on 
the better powers before the worse ones are utilized, but 
that the utilization of the poorer powers can never 
logically be said to cause the better powers to yield a 
rent. Emergence of rent on the better grades or 
on the better powers of land, and the employment of 
the worse land or powers are different effects of the 
same cause. 

It may be said that in the case assumed the increase 
in the income of the landowner is riot a true rent, but 
a species of monopoly gain, since it is a " marginal " 
return, not differential. This is, of course, to assume 
the very thing that it is sought to prove, that the income 
from land is caused by differences in the fertility of the 
soil. 

Even if it is assumed that the gradations between the 
different kinds of land and the different powers in each 
kind are infinitesimal, so that an extension of cultiva- 
tion is an inevitable concomitant of rise in rent on the 
better grades or powers, it would obviously be incorrect 
to speak of either phenomenon as the cause of the other. 
But under such an assumption it would be quite correct 
to speak of rent as being subject to differential measure- 
ment. And that is practically all that the classical 
position signifies. 

The term " differential" has received such wide ap- 
plication in recent economics that the definiteness of its 
meaning is in danger of disappearing. When we say 
that an income contains a differential element it is by 
no means clear what that element really consists in. 
It may be merely a quantity of satisfaction, such as that 
which is afforded by the earlier units of consumers' 
goods ; it may be a part of the price, such as the addi- 



68 American Economic Association. [946 

tion to normal price clue to monopoly control ; or again, 
it may consist in concrete goods. The laborer who 
works in a community which is well provided with capital 
and land thus produces an income containing a differential 
element, measured in goods. If, then, we wish to con- 
sider whether rent may be distinguished from wages 
and interest on the ground that it is a differential 
return, it is necessary to be on our guard against shifting 
our point of view. One can readily see that it is 
execrable logic that will confuse an income which is 
differential from an objective point of view with the 
subjective differential that may be attached to any in- 
come. Yet it is hardly too much to affrm that this is 
what modern economic terminology tends to do. 

It is accordingly necessary to consider the various 
points of view from which rent may be regarded as a 
differential income, and to examine wages and interest 
from the same points of view. In this way, and in this 
way only, will it be possible to determine whether we 
have here a characteristic which sharply distinguishes 
rent from the two other forms of income. 

The subjective differentials which compose the so- 
called consumers' and producers' rents do not require 
detailed discussion here. If rent were indeed an income 
which entailed no subjective cost, while wages and in- 
terest served chiefly to cover such cost, we should have 
one perfectly definite characteristic which would mark 
off rent from interest and wages. But it is generally 
admitted that there is a surplus of utility over disutility 
in the income to labor and capital, and as we have seen, 
only a part of the rent of land can be considered as such 
a surplus.' Moreover, subjective surpluses, if correctly 
analyzed, have no effect upon either the production or 
1 Supra, chap, ii, sec. 13. 



947] Rent as a Differential or Residual Income. 69 

the distribution of wealth. It is a matter of interest to 
the social philosopher that the earlier hours of the 
working day afford a considerable surplus of pleasure 
over pain. But if that surplus were reduced to practi- 
cally nothing, the laborer would have no reason for 
working fewer hours, and hence the volume of produc- 
tion would be unchanged if the surplus ceased to exist. 
In like manner the consumers' surplus on the earlier 
units of goods acquired does not affect the number of 
units which will be demanded, nor does it affect the 
utility or the value of the last unit. Objective differen- 
tials alone are of importance in economic description. 1 

The most familiar type of objective differential is that 
which is illustrated in the Ricardian formula. An eco- 
nomic agent is divided into units which are measured, 
not according to their economic qualities, but according 
to certain physical characteristics. A unit of land is an 
acre, a unit of labor is an individual workman, a unit 
of capital is a particular machine. Such units may be 
arranged in a series, and their economic importance may 
be measured either from the least productive or from the 
most productive. If the former method is adopted, as 
much of the income of a better unit as exceeds the pro- 
ductivity of the worst unit is a positive differential. 
The latter method would create a series of negative dif- 
ferentials. 

As it is assumed that the worst unit of land yields no 
rent, the product of any other unit is regarded as a posi- 
tive differential. If it is possible to find capital goods 
that pay no interest, there is no reason why the return 
to any unit of capital should not be regarded as a differ- 
ential of the same nature. Professor Clark has pointed 
out the fact that there is a point in the life of each 
1 Supra, chap, i, sec. 6. 



70 American Economic Association. [948 

perishable capital good when it yields its owner no sur- 
plus above the return to the complementary agents that 
are employed with it. 1 It may be possible to find laborers 
so inefficient that they add nothing to the product of in- 
dustry, in which case the wages of better labor could be 
described as a differential. If, however, it is preferred 
to regard as marginal labor that which receives a wage 
sufficient for bare subsistence, the greater part, though 
not all, of the return to efficient labor may be treated as 
a differential. The claim has been urged, and with 
much force, that land Requires a minimum return for 
upkeep f and the reduction to desert of grazing lands in 
the West and in Australia proves that even " marginal " 
lands require a certain care, and so must produce a min- 
imum return similar to the minimum of subsistence for 
labor. The differential in rent would then be measured 
from a minimum return, not from zero. But whether 
the differential is measured from zero or from a mini- 
mum return is a matter of practically no theoretical sig- 
nificance. Few economists would now subscribe to 
Walker's dictum that " the whole theory of rent rests on 
the assumption that there is a body of no-rent lands." 3 
Although it is possible to conceive of units of labor 
and of capital that are based upon purely physical char- 
acteristics, yet to do so is to violate established usage. 
A unit of labor in economic theory almost always means 
an amount of labor of a given efficiency. Ir two child- 
ren are able to do the work of one man, we should 
naturally say that they represent as many units of labor as 
a man. If there are laborers who make no specific addi- 
tion to production, we should not call them units of r,o- 

1 Clark, Distribution of wealth, 96. 

2 Hobson, Economics of distribution, 155. 
'Political economy, 3d ed., 222. 



949] Rent as a Differential or Residual Income. 71 

wage labor ; we should say that they represent no labor 
at all. The capital goods which are at the point of being 
discarded and which add nothing to the product of in- 
dustry are not capital in the economic sense of the word. 
" All portions of capital do, in proper economic theory, 
' bear an equal rate of interest," l and the same thing is 
generally held to be true of all units of labor. 

Economic usage notwithstanding, there appears to be 
no reason in logic why two acres of poor land should 
not stand for the same number of units of land as one 
acre of good land. To reduce land to units of efficiency 
is a process exactly analogous to the reduction of labor 
and capital to units of efficiency. No-rent land is no 
more an economic agent than is the capital that yields 
no interest. 

It is not, however, difficult to understand why the 
unit of land should have been described in one set of 
terms and the units of labor and capital in another. In 
the first place, in spite of the variations in the efficiency 
of labor, custom has always tended to reduce to a certain 
uniformity the work actually performed by ordinary 
workmen. A "day's labor" formerly conveyed a far 
more definite meaning than " the use of an acre of 
ground." It is the tendency of modern improvements 
in the technique of agriculture and in transportation to 
lessen the differences in the productivity of the soil. 2 
At the same time, modern industry permits of a wider 
range of personal differences than did a regime of cus- 
tom. The term " an average acre of land " thus comes 
to possess a more definite significance than formerly, 
while the term " an average day's labor " conveys a less 

1 Walker, The source of business profits, Quarterly Journal of Eco- 
nomics, vol. ii, p. 287. 

2 Patten, Premises of political economy, p. 27 et seq. 



72 American Economic Association. [95° 

definite meaning with the ^progress of industry. The 
possibility of reducing land to units of efficiency is 
at present scarcely less than that of reducing labor to 
similar units. 

Sec. 27. But the chief cause for the difference in the 
treatment of land on the one hand and labor and capital 
on the other was the conviction that the differential on 
the better land bore a relation to price quite different 
from the relation to price of the analogous portions of 
wages and interest. One might call the wages of, the 
poorest workers marginal, and the excess over such 
wages that better labor receives differential. But the 
relation of the differential and the marginal portions of 
wages to price was seen to be identical. Whether sugar 
beets are cultivated by three children, by two Russian 
women, or by one man, the cost to the entrepreneur and 
the price to the consumer are the same. To classify 
portions of the wages of the more efficient workers as 
differential and non-differential has, therefore, no eco- 
nomic significance whatever. If, however, workers were 
paid equally, the wages of the least efficient labor might 
bear a peculiar relation to price, and the distinction 
would be of economic importance. 

The description of rent as a differential of this kind 
is then of theoretical importance if rent is not a cost, if 
it does not enter into price. Until it is independently 
proved that rent is not a cost, the differential analysis 
which is based upon a comparison of the productivity of 
unlike units is incapable of distinguishing rent from 
wages and interest. The discussion of this question 
must, however, be postponed to the next chapter. 

SEC. 28. But even though we describe the units of 
labor, capital, and land in terms of productivity, so that 
there are none which do not yield a return, it is never- 



95 1] Rent as a Differential or Residual Income. 73 

theless possible to treat their incomes as differentials. 
Although such units are by definition equally produc- 
tive, they must differ in some respects that are of great 
theoretical importance. They will require very different 
proportions of complementary agents to endow them 
with normal productivity. 1 Thus the capital which is 
embodied in old and inefficient appliances will require a 
far greater quantity of labor to work it than an equal 
amount of capital embodied in machinery of the most 
improved type. 

The goods produced by the aid of the former appli- 
ances will represent a high labor cost and a low cost in 
capital. 2 As the machinery deteriorates still more, the 
cost of the product resolves itself more and more into 
labor cost until a point is reached where the product is 
economically created by labor alone. This peculiarity 
of industrial units is nowhere so obvious as in the case 
of land. A unit consisting in very poor land will often 
require a comparatively great expenditure for labor and 
capital ; and if the land be sufficiently poor, the entire 
product may be due to the labor and capital. 

Under the assumption of perfect competition, the vari- 
ous units of labor will have migrated from point to 
point until they have become equally productive, 
whether they are combined with a hundred units of cap- 

1 In his criticism of Professor Clark, Loria objects strenuously to 
the notion of varying proportions in the combination of industrial 
agents. The proportions, he says, are fixed by immutable physical 
laws, (II capitalismo e la scienza, 19). The fallacy of his position 
is due to the fact that he conceives of units of capital, labor, and land 
as physically alike, when in fact they are alike only with respect to 
some economic quality that we select as relevant to our immediate 
needs. It would be absolutely impossible to select a unit of capital 
which would be based both upon static productivity and upon its 
habits of combining with other units of productive agency. But this 
is clearly what I^oria tries to do. 

2 Clark, Distribution of wealth, p. 96. 



74 American Eco?iomic Association. [952 

ital and land or with one unit, or with practically none 
at all. If, then, we desire a measure of the efficiency of 
labor, of its true importance to the economic organism, 
we have it in the product of the labor which is working 
virtually unaided. 

We may, if we choose, arrange the supply of all com- 
modities with reference to the relation between the 
value of each unit and its cost in labor alone. Those 
portions of the supply that are produced by labor which 
is combined with very little capital and economic land 
would represent the margin of greatest labor cost ; all 
other units would have a value greater than their cost, 
counting only the specific form of cost which we are 
considering. That surplus value would of course be 
the income to capital and land described differentially. 
In the same way it is possible to form a differential 
series with reference to cost in capital, and another in 
which the cost in the uses of land receives similar em- 
phasis. The significance of such series of differentials 
consists in the fact that a field thus appears in which 
some units of each agent work practically unaided. It 
will be remembered that one of the chief ends that the 
classical economists sought to attain was the discovery 
of a field in which the whole product of industry was 
divided between labor and capital, where " whatever is 
not interest is wages." i It would be superfluous to 
point out here the connection between Ricardo's law of 
rent and his proposition that commodities exchange in 
proportion to the labor that has been expended upon 
them. Now it is no more impossible, theoretically, to 
discover a field where labor works virtually unaided by 
capital and laud than to find one in which labor and 
capital work without the use of economic land. In 

1 Cf. Von Thiinen, Der isolite Staat, II, 137 et scq. 



953] Rent as a Differential or Residtia/ Income. 75 

either case it is necessary to disregard the trifling con- 
tribution which is due, even at the margin, to the ex- 
cluded factor or factors. 

The advantage of the method of differential analysis 
here suggested is that it does not require the existence 
of no-rent land in order to find a field where the product 
of labor and capital are practically dissociated from the 
product of land ; nor does it depend upon the margins 
of labor and capital to distinguish pure interest and 
wages. Where a great deal of labor and capital a re em 
ployed on a small amount of land, even if that land 
pays a considerable rent per acre, the value of each 
unit of commodities produced will more nearly resolve 
itself into wages and interest alone than where a smaller 
amount of labor and capital are employed upon a great 
deal of land that pays a small rent per acre. In a de- 
veloped economy it is perhaps more likely that the pure 
product of labor or of capital will appear in connection 
with the better land than in connection with the poorer. 

Sec. 29. Both of the differentials discussed above 
are phenomena of static society. If industry became 
quite stationary, it would still be possible to find acres 
of land, capital goods, and laborers that produce a merely 
nominal return, or labor combined with such insignificant 
qualities of intra-marginal capital and land as to be work- 
ing virtually unaided. But there is another class of differ- 
entials illustrated in the so-called intensive law of rent 
which actually appear as differentials only when dynamic 
movements of industry take place, and which can be ex- 
plained only on the assumption of dynamic phenomena. 

In any group of producers' goods that are combined 
for the production of a single commodity, a change in 
the proportions of land, labor, and capital will mean a 



76 American Economic Association. [954 

change in the productivity of every unit of each factor, 1 
provided that the additional units are of the same gen- 
eral character as the original ones, and that no change 
in the technique of production has altered the normal 
proportions of combination in that branch of industry. 
If the amount of labor increases, the productivity of each 
unit of labor declines, while each unit of capital or of 
land becomes more productive. We may conceive of 
the quantity of labor increasing until the productivity 
of any unit becomes so small as to be quite negligible. 
We should then have a series of differentials represent- 
ing the productivity of labor under the widest range of 
conditions that are of economic importance. Under the 
worst conditions, from the point of view of labor, the 
product of a unit is zero ; under the best conditions it is 
the entire value which labor could create if combined 
with unlimited capital and land. 

If we start with the most favorable possible condition 
for labor — when the units of labor are few and capital 
and land are practically unlimited — and gradually in- 
crease the number of units of labor, we shall have a de- 
cline in the productivity of each unit. The earlier units, 
it is usually said, are more productive than the later 
ones ; accordingly, a differential surplus connects itself 
with them. Accurate analysis shows, however, that at 
any given time there are no favored units, that in the 
economic sense of the word the "earlier" and the 
"later" units are equally productive. The differential 
series is connected, not with different units at one time 
and under one set of conditions, but with the same unit, 
or identical units at different times and under different 
conditions. At no time, then, does such a differential 

1 Stipra, chap, i, sec. S. 



955] Rent as a Differential or Residual Income. 77 

surplus exist, except in thought 1 Since, however, a 
change in the quantity of labor which reduces the pro- 
ductivity of labor increases at the same time the produc- 
tivity of the other factors, it is not unnatural, though in- 
accurate, to identify the increased income of the factors 
of which the position has been improved with the dimin- 
ished productivity of the factor which suffers through 
the change. 2 

Such a differential, or pseudo-differential, we may des- 
ignate as the dynamic differential, to distinguish it from 
the kinds of differentials discussed above. It is the one 
which appears in the "intensive law of rent." Origin- 
ally the rent of land alone seemed capable of being de- 
scribed as a differential of this nature. But in recent 
years several economists have successfully applied the 
same method to the explanation of wages and interest. 3 
Its application to capital and labor are obviously impli- 
cations of its application to land. Why, then, was this 
fact practically overlooked for a whole century, and why 
do so many economists of the present day regard it as 
merely an over-refinement of theory ? 

SEC. 30. The conception of a dynamic differential 
series rests upon the assumption that one of the factors 
of production remains stationary in quantity while the 
quantities of the other factors increase. The " earlier " 
and " later " increments that figure in trie illustration 
are units of the factor which varies in quantity. Now 
if there were some law that made it inevitable that all 
of the factors of production would increase at the same 

*For a slight qualification of this statement r/". supra, p. 15, foot- 
note. 

2 Supra, chap, i, sec. 8. 

3 Clark, Distribution of wealth, p. 319 et sea.; Hobson, The law of 
the three rents, Quarterly Journal of Economics, vol. V, p. 270. 



78 American Economic Association. [956 

time and in the same degree, such a conception would 
be wholly valueless. It would be a description of an 
impossible phenomenon. If, on the other hand, one of 
the factors increases at a more rapid rate than the 
others, it would be quite legitimate to assume that it 
alone increases while the other factors remain un- 
changed. The description would be only approximately 
true, but it would gain in clearness what it lacked in 
accuracy. If one of the factors is capable of increase, 
but is of such a nature that it inevitably lags behind 
the others, it would be unnatural to assume that it alone 
increases in quantity while the other factors remain un- 
changed. h\\ of the phenomena of change could be 
accounted for by assuming that the factor which is least 
subject to dynamic influences remained static, while 
assuming that the other factors increased somewhat less 
than they do, absolutely considered. 

When Ricardo wrote, the quantity of available land 
increased slowly, and rents were actually rising ; 
labor and capital were rapidly increasing in quantity, 
and interest seemed to be declining to a minimum, 
while wages appeared to manifest a tendency to approxi- 
mate the barest needs of the laboring population. It 
was, therefore, natural to assume that the quantity of 
land is fixed for all time, and that labor and capital are 
capable of indefinite increase. The assumption that the 
quantity of labor remains unchanged while capital or 
land increases would have seemed then an utterly fruit- 
less one. It would have been hopelessly abstract even 
for Ricardo. 

But as we have seen, the land which remains un- 
changed in quantity is geographic, not economic land ; 
yet it is the latter which alone has significance in eco- 
nomic theory. And economic land may increase quite 



957] Rent as a Differential or Residual Income. 79 

independently of any corresponding increase in capital 
or labor. 1 Moreover, recent theory has been compelled 
to abandon the notion that the minimum of subsistence 
fixes the standard of wages, or that any immutable law 
fixes a stationary return to capital. Accordingly it is 
not an absurd assumption that the quantity of land 
varies while capital and labor remain stationary. 

We may conceive of Von Thiinen's isolated state an- 
nexing, by means of improved transportation, a great 
area of waste, which thus becomes economic land, not 
inferior in fertility and effective situation to the lands 
nearer the metropolis. Assuming the economic fluidity 
which we always assume when we discuss the effects 
of increase in capital or labor, we should see each estab- 
lishment, agricultural or manufacturing, adding new 
acres or front feet, employing its stationary quantities 
of capital and labor upon greater areas of land. As the 
additional units of land are successively taken into these 
establishments, we should see their productivity gradually 
decline. No acre could receive for its owner a greater 
return than the product of the last one of the same de- 
gree of productiveness. The greater productivity of 
the earlier acres would at first appear as a profit in the 
hands of the entrepreneur ; but competition would soon 
make it over to the stationary factors, capital and labor. 
Thus we should have a differential series in which the 
" earlier " units of land appear to be more productive 
than the " later." This series is precisely analogous 
to that which is connected with the earlier " doses" of 
capital and labor, when those factors increase and land 
does not. 

No doubt, under the conditions assumed, the increase 
in wages and interest would react upon the supply of 
1 Supra, p. 38. 



So American Economic Association. l95^ 

labor and capital, and hence would tend to restore the 
original quantitativcrelations. But the reaction would 
not necessarily equal in force the primary dynamic phe- 
nomenon, increase in economic land. It must be remem- 
bered that high rents, due to relative increase in capital 
and labor, have a similar influence in increasing the 
quantity of economic land. ' In either case there is no 
reason why the primary dynamic influence would not 
result in new and higher standards of permanent income. 1 
It is quite conceivable that the birth rate may so de- 
cline that population will remain practically stationary 
during the next century. At the same time capital 
may increase indefinitely, owing to the greater degree of 
security and the development of thrift in the general pop- 
ulation, and improvements in transportation may greatly 
increase the amount of effective economic land. Under 
such circumstances wages would doubtless continue to 
rise, while the rates of interest and rent would un- 
questionably fall. In that case it would be natural to 
regard a great part of wages as a differential on early 
increments of land and capital. It would be perfectly 
natural that theorists, in order to give perfect consist- 
ency to their systems, should assume a time when labor 
was for economic purposes unlimited, and explain the 
whole of wages as a differential on the earlier units of 
land and capital. Such an assumption would, of course, 
be historically untrue, but not much more untrue than 
the classical assumption of unlimited economic land. 
In every age there have, indeed, been areas of unused 
land which could be turned to economic account ; but 
so also have there been classes of workmen unemployed. 
In either case there was either a temporary misadjust- 
ment, or the technique and the control of complementary 
1 Cf. supra, chap, i, sec. 8. 



959] Rent as a Differential or Residual Income . 81 

factors was not such as would permit of the economic 
use of the unutilized agents. 

SKC. 31. If, then, one of the factors of production is so 
constituted by nature that it remains relatively stationary 
in quantity during an indefinite period of dynamic 
change, it will be quite correct, according to the princi- 
ples of economic logic, to regard its income as peculiarly 
subject to the dynamic differential analysis. It would 
be quite irrelevant that the same analysis could be ap- 
plied to the other factors by assuming that they in turn 
remained stationary in quantity while the actually 
changeless factor increased. Assumptions which are not 
in some degree generalizations from reality may be em- 
ployed as a foundation for fictitious logical constructions, 
but will not assist in the discovery of truth. 

Whether the rent of land shall be regarded as a differ- 
ential income depends, then, upon the question whether 
or not economic land is capable of increase indepen- 
dently of a corresponding increase in capital. The 
claim has been advanced in the second chapter of this 
essay that land is capable of such increase; therefore it 
is maintained that logic requires the application to cap- 
ital and labor of the same analysis which is usually 
applied to land alone. Rent is not characteristically 
differential from the dynamic any more than from the 
static point of view. 

But while each of the factors of production, treated as 
a whole, is capable of increase, there are certain forms 
of labor, capital, and land that remain practically un- 
changed in quantity. These are usually forms that are 
specialized to a single use — the monopoly goods of 
Wieser's analysis. Every increase in the demand for 
the commodities produced by their aid will tend to 
6 



82 American Economic Association. [960 

change the quantities of mobile productive goods em- 
ployed in combination with them, and consequently to 
increase their share in the physical product. Growth in 
the quantity of the mobile factors will likewise change 
the proportions of combination with these immobile 
factors, and will consequently increase the share imputa- 
ble to them. The return to such " monopoly goods " 
will therefore be most naturally measured differentially 
upon the successive units of mobile agency applied to 
them. Moreover, the productivity of the mobile pro- 
ductive goods is tested in general industry ; that of the 
monopoly goods must be discovered in the isolated com- 
binations in which they occur. And this may be done 
either by returning the mobile factors to general indus- 
try and thus discovering how much value is lost by 
leaving the monopoly goods unemployed, or by estimat- 
ing the product of the mobile goods marginally and 
treating the return to monopoly goods as a residuum. 
The residual test is, of course, the natural one. 

If we consider what concrete forms of productive 
agency answer to this description, we shall find, indeed, 
many forms of land, especially land which is peculiarly 
adapted for certain uses in commerce and industry. 
But we shall also find numerous forms of capital and 
labor that for one reason or another do not respond to 
dynamic influences that affect the general mass of these 
agents. It is true that such forms of land are likely to 
retain their monopoly position for a longer period than 
like forms of capital and labor ; but we must remember 
that at all times there is a complex of capital-goods and 
of labor which holds a similar position. If, then, we 
wish to retain the designations " differential " and 
" residual," we shall probably find it most expedient 



961] Rent as a Differential or Residual Income. 83 

to apply them to the return to the strictly monopoly 
factors, whether forms of land, labor, or capital. 

The customs and laws of land tenure have a 
tendency to confuse ordinary land, which is mobile in 
the economic sense of the term, with the monopoly 
goods of the foregoing discussion. A great proportion of 
the entrepreneurs of modern society find it a simple mat- 
ter to increase the labor and capital under their control, 
while to rent or purchase additional land involves a con- 
siderable amount of friction. To vary the amounts of 
capital and labor employed with a given quantity of 
land is a more frequent procedure than to vary the 
quantities of land with a fixed amount of capital and 
labor. The conception of land as a fixed quantum and of 
capital and labor as variables thus gains an established 
position in the business consciousness. But it is clear 
that many forms of capital (e. g., a ship or a building, 
and many forms of labor, such as that of a business 
manager) share this characteristic with land. It is also 
clear that the friction which gives rise to such a char- 
acteristic is not sufficiently important in modern industry 
to serve as a basis for a theoretical distinction- between 
sources of income. 



CHAPTER V. 

THE RELATION OF RENT TO PRICE. 

SEC. 32. There is hardly any subject in economic 
theory that has been more voluminously discussed than 
the relation of rent to price. The problem, though in- 
volved, can hardly be called one of the most intricate 
with which economics deals ; and it would, therefore, be 
presumptuous to undertake to add much that is new to 
the existing controversial material. Yet so long as 
eminent economists of one school assert that rent 
obviously bears a relation to price quite different from 
the relation to price borne by wages and interest, while 
equally eminent economists of another school assert 
with equal confidence that in this respect rent does not 
differ from the other two forms of normal income, it 
cannot be a wholly superfluous task to examine the 
premises and the reasoning which lead to the assump- 
tion of positions thus diametrically opposed. 

A history of the doctrine of rent which we associate 
with the name of Ricardo would be little more than an 
enumeration of the names of economists who have sub- 
scribed to it. In the form in which it left the hands of 
Ricardo it appears practically unchanged in all classical 
economic writings down to the time of Walker, whose 
statement we may accept as typical. 

The normal price of any commodity is fixed by the cost of the pro- 
duction of that part of the supply which is produced under the most 
disadvantageous conditions. The cost of that part, whatever that 
cost may be, will determine the price of all other portions, no matter 
how much more favorable the conditions under which these may be 
produced. Applying this principle to a single agricultural crop, e. g., 
wheat, we say that the normal price of wheat will be fixed by the 
cost of raising it upon the least productive soils which are actually 
cultivated for the supply of the market. . . . But if the price of 



963] The Relation of Rent to Price. 85 

the whole crop of wheat is to be fixed by the cost of raising it on the 
least productive soils actually cultivated, then rent is not a part of the 
price of agricultural produce, since the least productive soils pay no 
rent ; and therefore rent cannot be part of the price of the wheat 
raised therefrom, and if not of this wheat, then of no wheat, since, as 
we have seen, the price of the whole crop is fixed by the cost of that 
portion which is raised on the no-rent land. 1 

A history of the criticism of the Ricardian doc- 
trine of rent would be somewhat less monotonous 
than a history of the doctrine itself, since the range of 
ideas is greater. Yet the points of view of the critics of 
the doctrine of rent are easily classified. Apart from the 
attacks of Carey, which spent their force upon a minor 
detail, the order of cultivation, we find three principal 
lines of criticism : (1) The poorest land in cultivation 
may yield a rent, and therefore a part of rent is a con- 
stituent element in price. (2) Portions of the supply 
yield no wages, and other portions pay no interest ; 
therefore the reasoning which is relied upon to prove 
that rent does not enter into price would prove that 
neither wages nor interest enter into price. (3) Rent is 
in the last analysis a portion of the total product of in- 
dustry, and only secondarily a money income. The 
existence of rent in its primary form is of the utmost 
importance in determining price. 2 

1 Walker, Land and its rent, 27. 

2 A number of objections to the Ricardian doctrine which do not 
appear in this classification have been presented by Professor Patten 
in his "Premises of political economy," pp. 21-45. Many of them do 
not appear to hold when the Ricardian doctrine is broadly interpreted. 
As a case in point we may cite the sixth count brought against 
Ricardo (p. 44), namely, that land may remain in cultivation even 
when the return is not sufficient to pay all costs in labor and capital, 
including under capital improvements fixed in the soil. This would 
be a reason for holding that the return to certain kinds of capital may 
be regarded as a " quasi-rent," to use Professor Marshall's expression, 
but it does not in itself necessitate any essential modification of the 
doctrine of rent. 



86 American Economic Association. [964 

Sec. 33. The first criticism was not entirely over- 
looked by Mill, ' it was advanced as an important quali- 
fication of the Ricardian theory by Professor Patten in 
his " Premises of political economy," 2 and has since be- 
come familiar to all students of economics. The poorest 
land in cultivation is almost certain to yield a rent, since 
such land has some value for other purposes — pasturage, 
the chase, the growing of timber. Price must ac- 
cordingly be sufficient to pay such " marginal rent," 
as well as wages and interest. More important is the 
corollary of this proposition, which shows that the rent 
of land for agricultural purposes must be counted as a 
part of the cost of the products of a market garden ; or, 
to put it in general terms, rent in any use must be suf- 
ficient to keep the land from falling into the best alter- 
native use. 3 If we are permitted to reduce all land to 
wheat fields, it is necessary to take into account the iact 
of marginal rent only. But a study of price is a study 
of relative value. In an investigation of the laws gov- 
erning the price of wheat little can be gained by ignoring 
the essential price relations between wheat and other 
agricultural products. It would be manifestly absurd, 
in order to determine the laws that govern wages and the 
price of the product of labor, to assume that all labor pro- 
duces shoes. If it should be proved, upon such an 
assumption, that wages do not enter into price, the proof 
would be valueless, as the premises vitiate the conclu- 
sion. It is needless to repeat the argument which 
shows that the assimilation of all kind of land to wheat 
land gives equally worthless results. 

But the modern defender of classical doctrines, while 

admitting that it is an essential fact of the problem that 

1 Mill, Principles of political economy, book 3, chap. 5, sec. 2. 

- p. 22. 

3 Jevons, Theory of political economy, 2d ed., preface. 



965] The Relation of Rent to Price. 87 

land enters into various employments, and that in many 
branches of industry rent is paid for the poorest land 
used, would still deny that rent enters into the price of 
the most expensive and price-controlling portion of 
supply ; and he would point to the well-known intensive 
law of rent as a sufficient defense of his position. If 
capital is applied in successive doses, one dose will be 
found which yields a return only sufficient to cover the 
cost of the labor and capital employed. Consequently 
there is a portion of supply which pays no rent. 1 

SEC. 34. The logic of the intensive law of rent has 
recently been called into question by several economic 
writers. It is said to overlook the organic nature of 
industry, and to imply a misadjustment which involves 
a denial of the theoretically free competition upon 
which the argument is based. For the first objection 
we may quote Hobson, who rejects entirely the notion 
that the productivity of a final unit of any agent is 
determinable. 

It is claimed that the product of the last dose of labor is to be meas- 
ured by the reduction in the aggregate product of the farm which 
would have attended the refusal to apply this last dose of labor. Now 
this is not justifiable. The withdrawal or refusal to apply this last 
dose of labor would have meant a diminished productivity not only of 
the other units of labor, but of the units of capital and of land, and 
part of the result of this diminished productivity of other units is 
wrongly attributed to the last unit of labor. 2 

Now this would be quite true if the " last dose" is de- 
fined loosely enough. If, for example, the dose of 
capital which is withdrawn from an acre is a bushel of the 
wheat that would normally be sown, a part of the loss 
would indeed be due to the sterilization of the uses of 
land, labor, and other capital employed. But careful 
economists, in assuming that a " dose " is withdrawn, also 

1 Cf. Marshall, Principles of economics, 3d ed., p. 475 et seq. 

2 Hobson, Economics of distribution, p. 145. 



88 American Economic Association. [966 

assume that the best possible rearrangement of the re- 
maining productive goods is made, so that only a slight 
deterioration of all of the forms of the agent in ques- 
tion takes place. 1 It may be that the effect of the ad- 
dition of a final unit of capital is simply to increase the 
efficiency of existing goods. Its physical product may 
be organically related to that of the other elements in 
production, but this fact does not make its economic 
productivity less distinctive. 

In the same chapter Hobson advances the claim 
that the premises upon which the intensive law of 
rent is based involve a previous misadjustment of the 
factors, thus discarding the principle of free competi- 
tion without which the whole doctrine is meaningless. 

If a tenant hires a piece of land and puts five doses of capital upon 
it when he ought to have put six, he pays a rent based on the assump- 
tion that he will make a full economic use of the land, i. e., that he 
will put six doses on it. If, discovering his error, he afterwards adds 
the sixth dose, he only appears to pay no rent out of its produce, be- 
cause he has all the time been paying a rent based upon the supposi- 
tion that he was working the land with six doses. 2 

The truth is that a certain harmony of combination of factors of 
production exists for various productive purposes. In a given case a 
certain proportion of the three factors of production is most produc- 
tive. If, however, there is a short supply of one of them at the 
former quality and price, a more than proportionate increase of one or 
both of the others may be substituted, involving, of course, an in- 
creased cost per unit of the increment of supply. 3 

Now it will be admitted that at any given time 
such a " harmony " exists, and that under the as- 
sumption of perfectly free competition no individual 
will be enabled to vary the productive combination 
without loss until some dynamic change in industry 
takes place. But if capital increases, the best possible 
proportions of the factors throughout industry change 

1 Clark, The distribution of wealth, p. 246 etseq. 

2 Hobson, Economics of distribution, p. 141. 

3 Hobson, Economics of distribution, p. 137. 



967] The Relation of Rent to Price. 89 

also. Free capital is in the market seeking bidders, 
and under the assumption of free competition it will 
get just what it adds to industry. It will add less than 
the former product of like units, because the adjustment 
existing before the increase in capital implied that in 
each industrial plant additional units of capital would 
create a less than proportionate return, and increase in 
capital would not change this fact. The new capital 
will, indeed, affect in a very slight degree the produc- 
tivity of all other units of capital, lowering their return ; 
it will likewise increase the product of all units of labor 
and land. But these changes cannot take place until it 
has been ascertained how great a total net increase is 
due to the new capital. No deduction from that pro- 
duct is made for rent ; increase in rent arises from an 
apparent deduction from the product of other units. 
There is, therefore, a portion of the supply into the 
price of which rent does not enter, and that portion 
actually appears whenever dynamic changes take place. 1 
It is true that if the new units are applied success- 
ively, those which are applied first must pay a rent. 
Moreover, if the final unit is divided into two smaller 
units, it will appear that a rent is connected with the 
one which is theoretically first. From this it has been 
argued that the rentless unit must be infinitesimal, i. e., 
no unit at all. 

No finite unit of product can be shown to be a no-rent unit in the 
theory of the intensive application of labor and capital with regularly 
diminishing returns. The concrete units are produced at varying 

1 This does not mean that the no-rent portion of supply exists only 
when a dynamic change is taking place. An individual producer can 
economically make an experiment which will demonstrate the pro- 
ductivity of unaided capital or labor only when new social units of 
these agents are distributed for employment. 



90 American Economic Associatioji. [968 

costs for labor and interest on capital, and every one contains an ele- 
ment of rent. 1 

The argument does not, however, seem to be valid 
from a strictly mathematical point of view. While we 
cannot conceive of marginal units of labor and capital 
which are so small that they cannot be divided, and 
cannot therefore directly conceive no-rent units, a con- 
sideration of the relation between the part of the appar- 
ent product of a marginal unit of labor and capital due 
to the labor and capital and the part really due to land 
will show that as the unit diminishes in magnitude, the 
ratio of the rent to the labor-capital product constantly 
grows less. Since this is the case, it is quite legitimate 
to conceive of the former quantity as becoming infinites- 
mal while the latter remains finite. To dispute this 
would be to deny the validity of practically the whole 
body of theoretical economics, as well as of that part of 
mathematics into which the Theorem of Limits enters. 

There appears, then, to be no reason for denying the 
validity of the intensive law of rent. There are portions 
of the supply into which rent does not enter, although 
such portions appear only when a dynamic change takes 
place. Even though all units of capital are given 
equally favorable positions in combination with land, 
there is yet a unit of product, created by all the units 
conjointly, which pays no rent. 

Sec. 35. To admit this, however, does not compel us 
to subscribe to the doctrine that rent does not enter into 
price. For it has been proved conclusively that portions 

1 Fitter, The passing of the old rent concept, Quarterly Journal of 
Economics, vol. xv, p. 439. In a footnote Pr fessor Fetter dis.laims 
any intention of disputing the validity of the method of increments in 
economic theory, claiming that this is a misapplication of it. The 
grounds for the difference between this and other applications is not 
apparent. 



969] The Relation of Rent to Price. 91 

of the supply of commodities are produced without the 
economic aid of labor or of capital ; yet it would be 
absurd to deny that wages and interest form elements in 
price. 1 There are units of commodities which are virtu- 
ally produced by labor and capital alone. Some of 
these units are produced by much labor and little 
capital ; other portions cost a great deal of capital and 
but little labor. Some units are created at an expense, 
say, of five units of labor and twenty of capital ; others 
may cost five units of capital and twenty of labor. No 
economist, however, would affirm that these units are 
produced at unequal costs, because he would not start 
with the assumption that the use of either capital or 
labor is not a cost. If there is a portion of supply 
which is produced by twenty-five units of labor, unaided 
by capital, it would not follow that this portion is the 
most expensive, since increased cost in labor is offset by 
diminished cost in capital. 2 From this it is clear that 
those units of supply into which rent does not enter can 
be considered the most expensive ones only in case it 
can be shown independently that rent, or more properly 
the use of land, is not a cost. Accordingly, it is not an 
injustice to the classical economists to affirm that the 
argument by which they sought to prove that rent is 
not an element in cost assumed the conclusion in the 
premises. 

Economic theory deals with three main forms of cost : 
(1) subjective cost, consisting in the pain and discom- 

1 Clark, Distribution of wealth, p. 360^ seq.; Hobson, Economics 
of distribution, p. 133 et seq.; Fetter, The passing of the old rent con- 
cept, Quarterly Journal of Economics, vol. xv, p. 437 et seq. 

2 Those economists who hold that the different agents combine, 
economically, in fixed proportions in each branch of production will 
see a gross misadjustment premised in this illustration. For my de- 
fense, cf. supra, sec. 30. 



92 American Ecoyiomic Association. [970 

fort attendant upon production ; (2) entrepreneurs' cost, 
consisting in payments which the business man must 
make in order to place a commodity upon the market ; 
and (3) social cost, consisting in the destruction of the 
commodities, or limited uses of commodities, which are 
at the disposal of society. 

Subjective costs evidently exercise influence upon 
price through affecting the supply of productive agency. 
In a dynamic society capital is increasing, and there- 
fore the influence of subjective cost everywhere mani- 
fests itself in checking the growth of capital. Economic 
land is also increasing, and the fact that increase entails 
subjective cost makes it clear that such costs limit sup- 
ply and influence values. 1 In a study of the relations of 
productive agency to price, limitation is, however, the 
fundamental factor ; and whether or not limitation is 
due to subjective cost is a matter of secondary import- 
ance. It is quite conceivable that through a process of 
adjustment, subjective cost to the laborer might become 
quite negligible, 2 and that capital might normally be 
saved under condition that no disutility would be in- 
volved. But so long as the quantities of labor and 
capital remain limited, these agents can still demand 
and receive, under competitive law, a part of .the product 
of industry ; and the relative payments for labor and 
capital will appear in relative prices. In the same way, 

1 It may be said that when once new land has been brought under 
cultivation, the fact that a subjective cost was originally connected 
with its utilization does not act to limit the use of its services. If 
society should become static or retrogressive, land would not be limited 
by reason of such cost once incurred. We are considering, however, 
the relation of subjective cost to supply of land, and hence to price, 
under existing conditions, and under existing conditions it is obvious 
that the cost of annexing and utilizing new areas is a limiting factor, 
exerting an influence upon absolute values. 

2 Patten, Theory of prosperity, 8. 



97 1] The Relation of Re?ii to Price. 93 

even if subjective costs no longer exerted an active in- 
fluence on the supply of land, land would still be limited, 
and its income would appear in price, as will be seen 
later. 

The relation of rent to entrepreneurs' cost need not be 
discussed at length, since it is not disputed by any im- 
portant modern economist that to the individual entre- 
preneur rent is an outlay similar to wages and interest. 
The farmer who is unable to pay the prevailing rate of 
rent for the land he uses is as surely driven out of busi- 
ness as one who cannot pay the ordinary rate of wages 
or of interest. Social customs may, indeed, treat wages 
and interest as preferred shares in distribution ; but this 
is not necessarily true, nor is it normally the case in our 
present society. The rent is fixed before the productive 
process begins ; if any loss occurs, it falls upon interest, 
or even upon capital. 

It remains to consider the relation of rent to social 
cost — whether the use of land for which rent is paid is 
a cost from the point of view of society, in the sense in 
which labor and the use of capital are costs. We must 
consider whether, to employ Wieser's expression, the 
administrators of a communistic state would be held as 
strictly to account for the use they make of land as for 
the use of capital or labor force. 

Social cost, so far as it is conceived as not merely col- 
lective subjective costs, is relative in its nature. A 
workman represents a possible amount of social service ; 
and when we consider the cost of a commodity to 
society, it is necessary to take into account as part of 
cost this possible service of laborers engaged in its pro- 
duction. A commodity which requires the services of 
an efficient workman obviously is more costly, from the 
point of view of society, than one which requires an 



94 American Economic Associatio7i. [972 

equal number of days' work of a workman who is in- 
efficient, even though the latter may suffer far more sub- 
jective cost than the former. Cost in this sense is 
reckoned ultimately in terms of utility, since every in- 
crease in the power of labor to produce utility makes the 
services of labor count as higher cost. 

In a static state costs of this kind would have so close 
a dependence upon values that the terms " high " or 
" low " social cost would convey no meaning. Every 
unit of labor, capital, or land would be placed at the 
point where its productivity is highest ; and the loss 
occasioned by its withdrawal would have no other 
measure than the immediate loss in utility. Com- 
modities having an equal utility would have equal social 
costs. In a dynamic society more units of productive 
agency may be used in the production of one commodity 
than in the production of another commodity of equal 
value. The former may then be said to have a high 
relative social cost. Now it is obvious that the high 
cost may be the result of a disproportionate employment 
of capital, just as well as of a disproportionate use of 
labor. Exactly the same thing is true of land. Any 
unit of land represents a quantity of possible social ser- 
vice ; and in reckoning the relative cost to society of 
different commodities, the quantity of land-use with- 
drawn from general industry must be counted in the 
same way as the quantity of labor and capital. The 
commodity produced with a disproportionate use of land 
has a high social cost, just as the commodity produced 
with a disproportionate use of labor or capital. One 
misadjustment is as costly as the other. 1 

It appears, then, that from whatever point of view we 
choose to consider costs, rent or the use of land does not 

1 Cf. Wieser, Natural value, p. 207 et seq. 



973] The Relation of Rent to Price. 95 

differ from wages and interest, or the use of capital or 
labor force. Under the assumption of free competition 
and private ownership of land and capital, it is illogical 
to affirm any difference between the relation of rent to 
price and the relation to price of wages or interest. 

SEC. 36. Yet it would be unreasonable to claim that a 
doctrine so deeply rooted as is the Ricardian theory of 
rent can be thus easily disposed of. There remain other 
factors in the problem which may be best considered in 
treating the third line of criticism, namely, that the 
primary form in which rent appears is as a concrete 
share in the product of industry, as a portion of supply, 
just as wages and interest are primarily shares in the 
product. 

As money or " real " incomes, wages and interest and 
rent consist in the wealth given in exchange for such 
primary shares in industrial product. Thus regarded 
they have an effect upon price very different from that 
which is ordinarily considered. As portions of the en- 
tire supply, their absence would cause a rise in price. 
In this sense there is no difference between rent on the 
one hand and wages and interest on the other. 

The real rent of land, as of everything else, consists in goods that 
the land virtually creates, and these enter into the supply of such 
goods and help to determine their value. . . . The rent of land, 
then, as the concrete product imputable to land, is emphatically an 
element in determining value. 1 

The modern Ricardian would probably admit that 
from one point of view concrete incomes are products. 
Yet it is only in a static state that it is possible to iden- 
tify product with actual shares in the distribution of 
wealth. Now it is not wages as product, but wages as 
an actual income, that are supposed to have a controlling 

1 Clark, Distribution of weilth, p. 356. 



96 American Economic Association. [974 

influence over price. The entrepreneur may withhold a 
part of the product of labor, in which case we may still 
call it wages, or better, part of the wages fund, and it 
will form a part of the supply in the same way in which 
rent forms a part of the supply, and so will affect price 
in the way in which it is here claimed that rent affects 
price. But the wages that are not withheld by the en- 
trepreneur perform a double function. They distribute 
the wealth that has already been produced, and they 
serve to show the laborer what he can expect from fut- 
ure production. The disposition of the wages fund of 
this year may not have much influence upon the supply 
of wheat of this year, but it will certainly influence the 
supply of next year. If the workman has been exploited, 
there will in the future be fewer workmen in the wheat 
industry. Prices and incomes thus distribute the fruits 
of present and past production, and distribute productive 
forces for future production. It is through the distribu- 
tion of labor that wages influence prices. 

If the laboring classes were paid barely enough 
for subsistence, a lowering of wages would have a fur- 
ther effect on prices, since it would diminish the total 
supply of labor. But in a society such as our own, it is 
obvious that a considerable reduction of general wages 
would not necessarily affect the supply of labor. 1 It is 
accordingly through the relation between wages and the 
distribution of labor that wages can properly be said to 
influence price. It is only by postulating a state in which 
labor is absolutely free to move from industry to industry 

1 A general decline in money wages would no doubt reduce the ef- 
fective supply of labor even under present conditions. But a decline 
in real wages, due to a general rise in the price of commodities con- 
sumed by the laborer, would hardly diminish the number of workers 
of the present, or materially check the growth of population. 



975] The Relation of Rent to Price. 97 

that we can say that wages in their entirety " enter into " 
price. 

But if instead of postulating a state in which labor is 
free and mobile — an exceptional and possibly transi- 
tional state, if the history of mankind is taken into 
account — we postulate a condition of society in which a 
rigid caste system distributes labor independently of 
income, wages might fall in any industry without 
reducing the supply of labor. While at first laborers 
would perhaps refuse to work at all, or would work with- 
out much zeal, the need for subsistence would drive the 
existing body of laborers to work as before in spite of 
lower wages. So long as the minimum of subsistence 
were not impaired, a fall in prices could not be prevented 
by any existing rate of wages. As soon as the price of 
any product fell so low as to reduce wages below that 
minimum, the volume of labor in the industry would 
automatically diminish until prices would rise sufficiently 
to afford the minimum wage. Under the assumption of 
wholly immobile labor, then, the minimum wage would 
alone have the power of fixing prices. Instead of making 
the comparatively mild assumption of a caste system, we 
might assume that all labor is of the same quality and 
produces nothing but shoes. A fall in the price of shoes 
could not be hindered by labor cost until the subsistence 
minimum had been impaired for at least an appreciable 
margin of labor. 

In either case it is obvious that the minimum of sub- 
sistence would not necessarily be the normal wage, if 
mobility of capital is assumed, and if capitalists are free 
to compete with each other for the employment of labor 
within any particular employment. Neglecting for the 
present the share assigned to land, we may say that in 
7 



98 American Economic Association. [976 

each branch of industry capital would earn normal 
interest, and the residue, whether great or small, would 
go to labor. Except in those employments in which 
that residue actually afforded a mere minimum of sub- 
sistence, prices would rise and fall quite without regard 
to the wages usually paid. Wages would appear to be 
price-determined, not price-determining. 

Sec. 2)7- We see, then, that the extent to which 
wages may be said to enter into price depends upon the 
degree of mobility that we assume. Where labor is 
absolutely fluid, it is true, in a modified sense, that the 
whole of wages enters into price. Where labor is quite 
immobile, only the subsistence minimum can be said to 
have any permanent influence in determining price. 
The same reasoning would obviously apply to capital. 
If classes of individuals were compelled to invest any 
capital which they might possess in some particular 
industry, a fall in price would not necessarily affect 
supply until it had caused a slackening in the rate of 
accumulation, or had brought about the consumption of 
existing capital. When the capitalist is free to invest 
his capital in any one out of a number of industries, a 
fall in interest causes an immediate migration of capital. 
Under the former assumption, the units of capital which 
bring influence to bear upon price are those which are 
saved with the greatest difficulty. Under the latter 
assumption, the units which hold the strategic position 
are those which find the least difficulty in migrating to 
other employments. In a competitive economy it is 
mobility that exercises actual control over prices. 

The only reason why it has seemed worth while to 
consider the effect upon wages and interest of complete 
immobility of labor and capital is that in expounding 
the Ricardian law of rent we are accustomed to make 



977] The Relation of Rent to Price. 99 

assumptions of much the same nature. If we assume 
that land is absolutely immobile, we must indeed admit 
that its actual income has no power to determine price. 
Its strategic position is worse than that of labor and 
capital, inasmuch as there is no minimum below which 
rent cannot fall. If all the land that is capable of grow- 
ing wheat is capable of growing nothing else, a fall in 
the price of wheat will act upon supply only through 
the reduction of income to labor and capital, although 
a reduction in rent will take place contemporaneously. 
If we assume that each kind of land is specialized to a 
single use, rents will rise or fall with prices. Land will 
have no power to prevent such changes in its income. 
Assuming as Ricardo did that all land yields nothing 
but corn, the landlord would clearly have no escape 
from a fall in rents. He would be reduced to the posi- 
tion of a passive recipient of whatever might be left by 
the mobile elements in production. 

It appears, then, that the distinction between rent 
on the one hand and wages and interest on the other 
rests ultimately upon the assumption of immobility 
of land and mobility of labor and capital. Labor and 
capital are assumed to be subject to competitive law ; 
land is assumed to be withdrawn from the field of such 
law. It would be a shallow argument which would 
treat such a discrepancy in assumptions as bad logic. If 
the facts of industrial life show that land is far less 
mobile than capital and labor, it is quite legitimate to 
assume immobility of land while assuming perfect mo- 
bility of labor and capital. Such assumptions will not 
serve as a basis for absolutely correct conclusions, but 
they will make possible generalizations which are 
approximate descriptions of reality. 

It has already been argued at some length that 



ioo American Economic Association. [978 

land is in reality mobile in the same sense in which 
labor and capital are mobile ; and the burden of proof 
lies with those who would hold that it is mobile in less 
degree. In the case of labor and capital, power over 
price is exercised through marginal mobility. It is not 
the worst labor nor the poorest capital which holds the 
position of greatest influence upon price ; it is undiffer- 
entiated labor and capital in the form of pure purchasing 
power. If prices fall in a given industry, it is possible 
that a few of the poorest workmen will starve and that 
increase in population will be slightly checked. It is 
also possible that a few marginal savers of capital, ac- 
customed to invest in this particular industry, will con- 
sume their capital. But it is obvious that an im- 
measurably greater influence on price is exercised by 
the laborers who are free to migrate to other industries 
and by the capital which is in a position to change its 
employment. 1 The mobile portions of labor and capi- 
tal form in reality only a small fraction of the total 
supply. Now it is here maintained that there is a part 
of the total supply of land which is so situated that it 
admits of alternative uses ; and that portion is suf- 
ficiently considerable to endow land as a productive 
agent with mobility and to give it the rank of a price- 
determining factor. There is doubtless land specially 
adapted to single uses and unrelated through margins to 
land possessing alternative uses ; there is also labor and 
capital in the like position. These immobile forms of 
productive agency — the " monopoly" goods of the last 
chapter — can alone be said to receive price-determined 
incomes. Under conceivable historical conditions, rent 
would not "enter into price;" but under the conditions 

1 Cf. Patten, Theory of prosperity, 46. 



979] The Relation of Rent to Price. 101 

of modern industry there is no satisfactory reason for 
treating rent in its entirety as a price-determined in- 
come. Ordinary land shifts from employment to em- 
ployment, seeking the highest possible reward ; and in 
so doing it affects the supply of different commodities 
and exercises a controlling influence upon price. 



CHAPTER VI. 

RENT, PROFIT, AND MONOPOLY RETURN. 

Sec. 38. In the foregoing chapters attention has been 
devoted exclusively to the relation between rent on the 
one hand and wages and interest on the other. In the 
present chapter it is necessary to consider the relation 
of rent to profit and monopoly return. The task is 
rendered difficult by the fact that economists are very 
far from an agreement as to the nature of profit and as 
to the distinction between profit and the gains from 
monopoly. Both forms of return, however, represent 
an excess of income from production above entrepre- 
neurs' cost ; and profits may be provisionally distin- 
guished from monopoly return on the ground that the 
latter income possesses a degree of permanence which 
the former lacks. 

Early economists paid little attention to the concrete 
form of income which most modern writers now agree in 
calling monopoly return. Adam Smith, indeed, recog- 
nized as monopolistic some of those sources of income 
which we should now class as legal and customary 
monopolies, and his earlier followers made certain al- 
lowances in their theories for monopoly phenomena. 
The first thoroughgoing analysis of monopoly, however, 
appears in Senior's " Political economy," which draws 
attention to the numerous forms in which monopoly re- 
turn may exist. Senior agrees with his predecessors 
in regarding rent and monopoly return as closely related 
incomes — a point of view which has never lacked de- 
fenders. 

There are in general three reasons advanced by the 



981] Rent, Profit, and Monopoly Return. 103 

classical economists for classifying rent with monopoly 
income : (1) land is a monopoly because its value does 
not correspond to the cost of improvement ; (2) land 
is a monopoly because it is limited in quantity ; (3) the 
return from land is a monopoly income because it im- 
plies no subjective cost. Adam Smith may be selected 
as a representative of the first view, Mai thus of the 
second, and Senior of the third. 

The rent of land, considered as the price paid for the use of the 
land, is a monopoly price. It is not at all proportioned to what the 
landlord may have laid out upon the improvement of the land, or 
what he can afford to take, but to what the farmer can afford to give. 1 

That there are some circumstances connected with rent which have 
a strong affinity to a natural monopoly, will be readily allowed. The 
extent of the earth itself is limited and cannot be enlarged by human 
demand. The inequality of the soil occasions, even at an early period 
of society, a comparative scarcity of the best lands, and this scarcity 
is undoubtedly one of the causes of rent properly so called. On this 
account, perhaps, the term partial monopoly may be fairly applicable 
to it. 2 

The fourth and last class of monopoly exists where production 
must be assisted by natural agents, limited in number and varying in 
power, and repaying with less and less relative assistance every in- 
crease in the amount of labour and abstinence bestowed on them. 3 

The reason which Senior gives for classifying with 
monopoly production thus aided is that a greater value is 
produced than by an equal amount of labor and abstin- 
ence in general industry. 4 These " natural agents," 
Senior explains later, consist chiefly in land. But that 
part of wages which exceeds the average remuneration 
of labor is also to be classed with the return to natural 
agents. 5 

1 Smith, Wealth of nations, I, chap. xi. 

2 Malthus, Political economy, 140. For an identical modern view 
see Macfarlane, Value and distribution, 123. 

3 Senior, Political economy, 105. 

4 Senior, Political economy, 103. 

5 Senior, Political economy, 130. 



104 American Economic Association. [982 

The above grounds for classifying rent with monopoly 
income do not, however, appear to be valid, since 
similar ones would make a monopoly income of wages 
or of interest, and no one would deny that these in- 
comes when normal differ fundamentally from that 
which is secured through monopoly. 

In the first place we may admit that the value of land 
does not correspond to the cost of improving the land ; 
but if we were to capitalize the earning power of labor so 
as to make labor strictly analogous to land, we should find 
that there is no law that makes the value of the laborer 
correspond with the outlay in bringing him up. The 
value of a capital good may tend to equal the entrepre- 
neurs' cost of production, but the value of the pure 
capital that the goods embody bears no direct relation 
to entrepreneurs' cost ; and it is the relation of pure 
capital to interest that must be compared to the rela- 
tion of land to rent. The fallacy of the position is due 
to the attempt to apply the laws of the normal valuation 
of finished commodities to one of the permanent agents 
of production. In the second place it is quite true that 
rent is due to the fact that land is limited relatively to 
the demand for its services, but limitation is just as 
essential if labor or capital are to possess earning power. 
Partial limitation of the better classes of labor is the 
cause of the higher productivity of such labor, yet we 
should feel that it is to use words in a new and strained 
sense to say that all labor except the very lowest kind 
receives a monopoly return. Finally, disregarding the 
question whether the landowner endures subjective costs 
or not, we may question the usefulness of a classification 
of income based upon subjective costs, a classification 
that would make a large part of the income of a laborer 
who is properly adapted to his calling a monopoly gain, 



983] Rent, Profit, a?id Monopoly Returji. 105 

while classing with wages the income of another who 
performs the identical economic operations, but who is 
so ill adapted to his calling as to endure extraordinary 
fatigue and pain. With such a classification one would 
be forced to adopt Professor Patten's view that when 
society shall be properly adapted to its environment, all 
income will be monopoly income. 

Sec. 39. In modern economics no definition of mo- 
nopoly has been agreed upon ; ! consequently it would be 
idle to search for an accepted definition of monopoly 
return. The conception of monopoly profit or net 
revenue is, however, sufficiently familiar. Manifestly 
not all of the income of a monopoly, but that portion 
alone which could not be secured without a control over 
prices is to be counted as monopoly return. 

Monopoly control over prices depends, in almost all 
cases, upon the power to determine the amount of pro- 
ductive agency which shall assist in supplying a given 
want in a market of greater or less extent. When any 
entrepreneur finds himself in a position to treat the price 
either of finished products or of productive agency as a 
variable quantity, appreciably influenced by his actions, 
he has the power to manipulate prices so as to secure a 
net return. If wages, interest, and rent are practically 
fixed data, his income results from the raising of prices 
and the consequent exploitation of the consumer ; if 
prices are practically fixed, monopoly gain must be sub- 
tracted from the earnings of industrial agents. 

Although there are numerous circumstances under 
which the gains of monopoly are virtually extorted from 

1 Professor Ely, Monopolies and trusts, p. 14, defines monopoly as 
"substantial and controlling unity of action." The definition is, 
perhaps, the most satisfactory we have, but it hardly covers all the 
phenomena that most would consider monopolistic. 



106 American Economic Association. [984 

the consumer only, monopoly return is in a strict sense 
the product of labor, capital, and land, and is diverted 
from the owners of these agents to the profit of the mo- 
nopolist. The person who holds monopoly control over 
a commodity may not endeavor to lower the prices paid 
for productive agency. He may even pay for the use of 
productive agents a higher rate than that which pre- 
vails in the general market. It is, however, obvious 
that the method by which the monopolist operates is to 
limit the amount of productive agency in a given branch 
of industry ; and in this way he increases the produc- 
tivity of each unit. From the enhanced productivity of 
the several units the monopolist secures his revenue. 
To illustrate this we may assume that a unit of labor is 
withdrawn from a monopolistic industrial establishment, 
and not replaced by labor from outside of it. The net 
loss, after deducting whatever may be due to the attend- 
ant dislocation of industry, will manifestly exceed the 
net loss which would result from the withdrawal of a 
similar unit from a competitive branch of industry. 1 

Thus it appears that this particular form of monopoly 
gain is exploitative, 2 in a sense, since it is a product 

'There are circumstances under which this is apparently untrue. 
The Standard Oil Company may havi men engaged in the manufact- 
ure of dyes who are making merely competitive wages. il Ever)' 
monopoly has s>me men employed in positions that yield the same 
net return as do the exposed industries with no monopoly " (Patten, 
Theory of prosperity, 72.) This merely signifies that an establish- 
ment which is monopolistic in some of its enterprises is not monopo- 
listic in others. The manufacture of dyes may be carried on com- 
petitively by the Standard Oil Company because it does not interfere 
with the market for its monopolized produce. To withdraw a work- 
man from such subsidiary enterprises would not result in loss of 
monopoly gain, but it would not, in reality, be the withdrawal of a 
workman from the monopoly. 

2 Exploitation, as the term is used in this chapter, conveys no ethi- 
cal significance. Whenever a productive agent does not receive the 
product which it creates, it is exploited in this sense of the term. 



985] Rent, Profit, and Monopoly Return. 107 

which is not secured by the agent which creates it. 
Labor, capital, and land produce the monopolists' net 
revenue. In any particular establishment they are not 
necessarily injured by it, since they may still receive a 
normal or more than normal return. 1 When, on the 
other hand, prices of finished commodities are not sub- 
ject to control, but prices of productive agency are, ex- 
ploitation of the same character takes place, but to the 
immediate and manifest injury of productive agency. 

But there is another form of monopoly income which 
has been touched upon in the above section, the pro- 
ducers' as contrasted with the entrepreneurs' gain. If 
laborers, by combination or by control over public 
opinion or government, are able to exclude men poten- 
tially of equal efficiency from their employment, they may 
maintain a higher degree of productivity than workers 
in general industry, and may retain the abnormal income 
for themselves. Under these circumstances it may be 
that no direct exploitation of any producer takes place. 
Workers throughout society may gain what they spe- 
cifically produce. The effect of the producers' monopoly 

Ethically, the owner of a productive agent has a clear right to its 
product only if his claim to the agent is uncontested, and if its pro- 
ductivity is not affected by wrong or favoritism in the distribution of 
units of agency. The laborers who combine to exclude others from a 
profitable industry gain an increase in wealth which is counterbal- 
anced by a greater loss on the part of excluded laborers, and it would 
not be straining the usual meaning of the term to say that the ex- 
cluded laborers are exploited. But it is necessary to have terms 
which will distinguish between the income based upon the produc- 
tivity of units of agency in one's legal possession and income appro- 
priated by parties in distribution other than the owners of the pro- 
ductive agents that create it. The former income is here classed as 
productive, the latter as exploitative. 

1 Of course the ultimate effect upon productive agency is unfavora- 
ble, since the units arbitrarily excluded from the monopolized branch 
must seek employment elsewhere, thus abnormally lowering income 
to labor, capital, and land. 



io8 American Economic Association. [986 

upon the consumer and upon productive agency which 
is excluded from the favored position does not differ 
from the effect of the entrepreneurs' monopoly upon the 
consumer and the outside producer. The distinction 
between the two forms of monopoly return lies wholly 
in the distribution of it within the group. If it is se- 
cured by the entrepreneur, we may properly term it 
monopoly profits ; if it is shared by labor, capital, and 
land, these agents may be said to secure monopoly 
wages, interest, or rent, as the case may be. 

Now with what one of these forms of monopoly 
gain are we to compare rent? It is obvious that an 
entrepreneur who possesses a monopoly will find it 
necessary, if he wishes to manipulate prices of finished 
commodities, to limit the amount 'of land which he uses, 
as well as the amount of labor and capital. The with- 
drawal from his employment of a unit of land will often 
result in a greater net loss in goods, measured in terms 
of value, than the withdrawal of a unit of similar land 
from competitive industry. The land is abnormally pro- 
ductive, and the surplus productivity is appropriated by 
the monopolist. If, however, the monopolist manipu- 
lates the price of productive agency instead of that of 
finished commodity, the land may be paid at abnormally 
low rates along with the labor and capital. Again, if a 
united group of landlords control a given crop and limit 
the area on which it is grown, the land may be made to 
yield an exceptionally great value-product for its owners, 
in which case the land is in a monopoly position, similar 
to that of the trade-union laborer. There may, then, be 
land which yields a return quite different in its nature 
from rent, and exactly analogous to the monopoly return 
secured through labor or capital. 

That the withdrawal of a unit of labor from an 



987] Rent, Profit, and Monopoly Return. 109 

industry which yields a monopoly return will result in a 
greater loss in value-productivity than the withdrawal 
of a like unit from competitive industry is so self-evident 
that an apology is due for repeating it here. Does the 
withdrawal of a unit of labor from an establishment 
which yields a high competitive ground rent mean a 
greater loss than the withdrawal of a unit from an 
establishment yielding a low rent? Does the final unit 
in extensive culture produce more than the final unit in 
the forms of intensive cultuie employed in the same 
country ? This is manifestly not true. Unless there is 
for some reason a greater dislocation of industry and 
impairment of the productivity of complementary 
agency, there is no reason for believing that the final 
unit — i. e., any unit — employed upon good land is 
more productive than a similar unit actually employed 
upon poor land. The final unit of labor in a monopo- 
lized industry is more productive than similar units 
placed elsewhere, and this surplus productivity is the 
monopoly "rent." We may therefore conclude that 
there is a fundamental difference between the so-called 
rent of monopolies and the rent of land. 

Sec. 40. Assuming that rent is sufficiently defined as 
a differential surplus above cost, and that profit is a 
" marginal " or general surplus, Professor Patten has 
undertaken to prove that monopoly return is simply the 
same fund as rent, viewed in a different way. 1 On the 
basis of the " law of substitution," or competition be- 
tween different kinds of goods in supplying a given 
genus of wants, he has developed the conception of a 
series of monopolies, each one producing at a uniform 
cost for all its units, while the several monopolies 
differ from each other in the expense of production, 

1 Patten, Theory of prosperity, p. 80 et seq. 



no American Economic Association. [988 

the one possessing fewest advantages receiving no 
surplus gain. The income of these monopolies is in 
this view a profit, although, when the whole class of 
monopolies is viewed as a group, it is represented by a 
differential series. The income of any monopoly, viewed 
by itself, is marginal or general ; viewed as a part of 
the income of all monopolies, it is differential. For this 
reason Professor Patten concludes that " rent and 
[monopoly] profit are one fund viewed in different 
ways." If we grant for the sake of the argument the 
existence of a number of monopolies forming a regular 
series, we still do not lose the distinction between ordinary 
ground rent and the surplus secured by the more favored 
monopolies. In those which are most nearly free from 
competition, land as well as capital and labor will 
usually be limited artificially. Now there should be 
no difficulty in distinguishing between that part of the 
product of the land which depends in no way on 
monopoly position and which could not be taken away 
by the freest competition, and that part of the product 
which exists as a result of artificial limitation, which 
is secured by one who may not have legal possession of 
the productive agent to which it is due, and which must 
disappear with increased freedom of competition. 

But there is a more fundamental criticism which may 
be brought against Professor Patten's position. No 
profound analysis is required to show that the differen- 
tials which figure in this series are quite unlike the 
differentials which figure in the law of rent. The units 
of labor, capital, and land in the stronger monopolies 
are not unlike those in the weaker ; they yield a higher 
return because of their better control of competition. 
The different " units" of land postulated in the law of 



989] Rent, Profit, and Monopoly Return. in 

rent are alike only in superficial area — a single one out 
of numerous economic characteristics. 

No satisfactory reason appears to exist for treating 
monopoly return and rent as like forms of income. 
Monopoly income is due to artificial limitation which 
enhances productivity ; rent is due to productivity, 
ultimately dependent upon natural limitation. We shall 
now consider whether rent bears any close relation to 
the other dynamic form of income, profit. 

Sec. 41. The concrete forms of income which are at 
present termed profit received no adequate treatment 
from the classical English economists. In early theory 
the fact that returns vary temporarily in the various in- 
dustries was of course perfectly understood, but the 
special income depending upon such variations was not 
considered important enough for special treatment. In 
his analysis of profit, Samuel Read approaches the prob- 
lem in a way distinctly in advance of the rest of the 
early English economists. He describes the excess of 
gain in any industry over and above the ordinary rate of 
interest as either wages — " reward for labour or indus- 
try, or ingenuity, or skill, in the use and application of 
capital, — or otherwise . . . the result of fortune or 
accident, — that is, of ' secret and unknown causes,' 
which sometimes occasion greater or less gain in trade, 
or no gain at all, and sometimes a loss, — and falls 
properly to be considered as compensation for risk" 
This latter form of gain, since it is regulated by no 
certain causes, Read declares to be " without the pale of 
science." ' 

We have here the germ of two of the modern views of 
profit. That part which Read treats as "wages" is 
manifestly analogous to the reward for superior capacity 

1 Political Economy, London, 1829, p. 263. 



ii2 America?i Economic Association. [990 

in organization which has been regarded by President 
Walker ' and Leroy-Beaulieu 2 as the true source of busi- 
ness profits. That part which he regards as compensa- 
tion for the risks attendant upon business operations is 
evidently the form of gain which is held to be typical 
profits by the modern exponents of the " risk theory of 
profits." This theory was more fully worked out by 
Von Thiinen, who distinguishes between risks which are 
sufficiently calculable in their nature to be undertaken 
by insurance agencies, and risks which are wholly incal- 
culable, such as changes in demand, the appearance of 
new competing products, and similar contingencies, 
which no insurance could cover and which the entre- 
preneur must meet himself. It is the latter form of 
risks for which profit is a compensation. The same 
economist points out that since the loss which one suf- 
fers when deprived of one's fortune far outweighs the 
gain secured by a doubling of one's means, no one would 
be an entrepreneur unless the chances of gain outweighed 
the chances of loss. Business must, therefore, afford to 
the undertakers as a class a net profit, after deduction 
has been made for all losses. This net profit Von Thiinen 
calls " Unternehmergewinn." 3 

This theory has been worked out in more detail by 
other writers, 4 but in its essential features it remains 
practically unchanged. At present we have in economic 
literature two theories of profits besides the above. One 
of these emphasizes the fact that the entrepreneurs as a 
class enjoy a monopoly position in society. There may 

1 Walker, The source of business profits, Quarterly Journal of Eco- 
nomics, vol. i, p. 275 et seq. 

2 Academie des sciences morales et politiques, I, 717 et seq. 

3 Der isolirte Staat, II, 81. 

4 Especially Mangoldt and Mr. Hawley. Cf. Willett, The economic 
theory of risk and insurance, p. 50 et seq. 



99 1] Rent, Profit, and Monopoly Return. 113 

be numbers of men in humble positions who are poten- 
tially able to carry on great enterprises, but who, 
through lack of business connections, never receive an 
opportunity to exercise their powers for management. 
Those who have the good fortune to be placed in charge 
of business affairs are for this reason enabled to demand 
for themselves an unduly large share of the product of 
industry. 1 This point of view is further developed by 
those economists who investigate the relative monopoly 
position of individual groups of entrepreneurs instead of 
that of entrepreneurs as a class. 2 Capable entrepreneurs 
may be relatively few in any group or sub-group, to 
employ Professor Clark's . terminology ; accordingly 
they have an advantage in purchase of materials, in em- 
ployment of capital and labor, and in sale of products, 
and this advantage gives them an opportunity to secure 
large profits. 

Finally we have a theory of profits which takes its 
point of view from the facts of an intensely competitive, 
but dynamic society. 3 A new use is discovered for a 
commodity, and until capital and labor can be diverted 
to its production, those who are already on the ground 
reap a rich harvest. A labor-saving machine is invented, 
and those who are able to apply it at once make great 
profits before its use becomes general and prices fall in 
proportion to the fall in cost of production. Frequently 
the entrepreneur who makes these gains runs no risk 
whatsoever. The productiveness of a new machine may 
be accurately calculated. No particularly high degree 

1 Macvane, The source of business profits, Quarterly Journal of 
Economics, vol. i, p. 1 et seq. 

2 Gross, Die Lehre vom Unternehmerge-winn, p. 132 et seq. 

3 Clark, Distribution as determined by a law of rent, Quarterly Jour- 
nal of Economics, v. 

8 



ii4 American Economic Association. [99 2 

of managing ability is required in its application. Mo- 
nopoly position, in the sense of a control over competi- 
tion, need not be assumed. The fortunate entrepreneur 
may reap a profit while offering no check to increase of 
output on the part of others, and while bending every 
effort to increase his own output. Such gains are of 
course transient at any one point in the industrial field, 
but they disappear from one industry to reappear in an- 
other. Entrepreneurs as a body always receive a flow of 
income of this nature. 

Sec. 42. It does not fall within the province of this 
paper to consider what view of profits is on the whole 
the most satisfactory. All that is necessary for present 
purposes is to present a sufficiently broad view of the 
fund which is usually treated as profits, in order to con- 
sider the relations of that fund to rent. The income of 
a fortunate and capable entrepreneur will contain (1) a 
gain due to chance, offset by a smaller loss 1 (borne, how- 
ever, by some other entrepreneur) ; (2) a gain due to his 
own power of combining labor and capital in ways more 
effective than those usually employed in the community ; 
(3) a certain share in the first fruits of economic im- 
provements ; (4) a part of the gains which entrepreneurs 
as a class secure through the fact that their services are 
limited in proportion to the demand for them. It is 
obvious that the second and third element are dependent 
in large degree upon the fourth. A system of social 
selection which would discover the business capacities 

1 The mere chance of reward is of course the actual compensation 
for risk. No compensation is afforded by society for loss. It will be 
questioned by some whether this form of risk is not really borne by 
the capitalist. Cf. Willett, The economic theory of risk and insur- 
ance. If the entrepreneur had no other source of return, it would 
obviously have to fall on some other factor. As the entrepreneur has 
other gains, there is no reason why he should not be thought of as 
bearing part, at least, of these risks. 



993] Rent, Profit, and Monopoly Return. 115 

of members of the working classes would perhaps reduce 
many forms of entrepreneurs' activity to the rank of free 
goods ; it would disseminate much more quickly the re- 
sults of economic progress. There would still remain 
different grades of entrepreneurs, and the better ones 
would receive a net gain ; there would still be temporary 
gains, though smaller and more widely diffused. 

The analogies that are alleged to exist between 
profit and rent are three in number: (1) that rent and 
profit are differential incomes ; (2) that they repre- 
sent a net surplus above cost ; and (3) that they are a 
price-determined income. We have already considered 
at length whether these are the true characteristics of 
rent ; we may now consider how far they are applicable 
to profits, studying separately, for convenience, each of 
the elements of the preceding section. It will be neces- 
sary, moreover, to examine in detail the economic nature 
of each of these elements of profit, in order to obtain a 
definite idea of the relations of profit as a whole to rent. 

It is obvious that the amount of dynamic risk varies 
greatly from industry to industry. If this is correctly 
understood by those who undertake the risks of directing 
industry, the return above normal wages and interest 
will vary in like manner, and thus it is possibe to 
arrange industries in a differential series, the industries 
with practically no risk representing the no-surplus 
units while those in which risks are highest represent the 
units of maximum surplus. But since a fall in price 
which would diminish any of these alleged surpluses 
would at once reduce supply, it appears that the pay- 
ment for risk forms a part of the necessary costs of pro- 
duction, and therefore has a power to control price. 
The analogy between this form of income and rent is 



1 1 6 American Economic Association. [994 

therefore very superficial, even from the Ricardian point 
of view. 

But there is a more important reason why it is inadmis- 
sible to regard this form of income as analogous to rent. 
If a unit of capital or labor is withdrawn from combina- 
tion with land where the so-called surplus which consti- 
tutes rent is greatest, the loss in product will not nor- 
mally be greater than when a unit which shows the least 
rent-surplus is withdrawn. When a unit of labor or of 
capital migrates from a combination which yields a high 
risk-surplus, the loss in product is normally greater 
than when it is taken from a combination in which the 
risk-surplus is nil. The rent surplus is produced by the 
land, and continues without appreciable loss when any 
one unit of complementary agency disappears from the 
establishment. The risk surplus is produced by the 
units of labor and capital, and is naturally reduced in 
proportion when these are withdrawn. 1 

We see, then, that the surplus return in an industry in 
which risks are high is in important respects similar to the 
income from a monopoly. Economically it is imputable 
to the units of productive agency, while in the distribution 
of product it is secured by the entrepreneur, or, in some 
cases, by the capitalist who assumes responsibility for 
risk. It differs, however, from monopoly return in other 
important respects, since it is necessary if production is 
to continue, and since it presupposes no price manipula- 
tion. The contrast with rent may, perhaps, be brought 
out more clearly by pointing out the fact that when the 
return to a branch of production is uncertain, the amount 
of land employed in it will be limited, just as the quan- 
tities of labor and capital in that branch are limited ; 

l Cf. Willett, The economic theory of risks and insurance, p. 60^/ 
seq. 



995] Rent, Profit, and Monopoly Return. 117 

and when production is successful, the land yields a 
risk surplus which may be distinguished from rent 
proper. 

SEC. 43. We may next consider that element in the 
profits of the entrepreneur which results from dynamic 
changes which the entrepreneur is able to foresee and 
profit by. When a new method of production reduces 
the cost of a commodity, even though any one is free to 
adopt the method, some manufacturers will be in a posi- 
tion to increase their output more rapidly than others, 
thus receiving a profit during the time when prices are 
falling. It is evident that in such a case the extension 
of the new method will usually be retarded by the imper- 
fect mobility of labor and capital. Entrepreneurs may 
be anxious to increase their product ; but so long as 
the requisite kind of labor is scarce, and so long as a 
sufficient supply of capital in the necessary form does 
not find its way into the new branch of production, the 
productivity of each unit of labor and capital will re- 
main above the normal. The imperfections of the mar- 
ket for productive agency prevent wages and interest 
in the industry affected by the change from rising in 
proportion to productivity, and therefore a net gain is 
left in the hands of the entrepreneur. 1 

The analogy of this form of profit with monopoly 
return is manifest. It is not a necessary form of income ; 
it is an "exploitative" 2 income, i. <?., it is not received 

1 It is obvious that this element in profit is not wholly independent of 
the one described in the preceding section. The chance that he will 
find opportunities for certain gains is one of the lures that induce 
men to assume the uncertain role of the entrepreneur. Reflection, 
however, will show that the two funds are not coextensive ; it is 
therefore permissible to treat them as separate elements. 

2 It may be superfluous to disavow any intention of conveying an 
ethical implication by the term exploitative. A new product has ap- 



n8 American Economic Association. [996 

by the owners of the agency to which it is economically 
imputable. But it is temporary in its nature, while 
monopoly return has a degree of permanence. More- 
over, while it is the acts of the monopolist which pre- 
vent a greater quantity of productive agency from enter- 
ing the industry which yields monopoly return, the 
activities of the entrepreneurs in seeking to secure a 
share in profits annihilates the latter form of income. 

Analogous to monopoly wages, interest, and rent are 
the abnormal wages, interest, and rent that may some- 
times be paid when the competition of entrepreneurs for 
a temporarily limited supply of productive agency is 
active. Like the entrepreneurs' profit, this abnormal 
productive income is temporary. A given unit of labor 
may be in a position to produce (1) wages equal to the 
normal rate ; (2) a surplus above this sum, analogous to 
monopoly wages, but transient in its nature ; and (3) a 
further surplus, likewise transient, appropriated by the 
entrepreneur. A given unit of land may yield a pro- 
duct which may be analyzed into three similar parts. 
It is not difficult to see the contrast between the sum of 
those parts of the surplus product of labor, capital, and 
land, appropriated by the entrepreneur, representing 
the element in profits now under discussion, and the 
normal rent of land. 

An effort has been made to minimize the differences 
between this form of profit and rent by proving that 
rent is a transient form of income. Emphasis is laid 
upon the fact that changes in consumption may reduce 
the rent now of one kind of land, now of another. 1 As 
well might we maintain that wages are a transient in- 

peared which competition will sooner or later give to the agents 
which create it ; but until competition has distributed it among the 
productive factors, it remains in the hands of the entrepreneur. 
1 Patten, Theory of prosperity, p. 79 et seq. 



997] Rent, Profit, and Monopoly Return. 119 

come, analogous to profit, because at one time the 
hand-loom weavers, at another time the hand composi- 
tors find their acquired powers losing their control over 

income. 

SEC. 44. In our analysis of profits two elements re- 
main : the extra product created by the skill of the 
superior entrepreneurs ; and the gain which is due to the 
fact that the social mechanism is defective in developing 
potential directive capacity, and therefore in endowing en- 
trepreneurs as a class with abnormal advantages. These 
elements are not distinct, but are mutually interdepend- 
ent. The entrepreneur may be paid in proportion to his 
productivity, but productivity is intimately dependent 
upon limitation. Skilled laborers may be paid in pro- 
portion to their productivity, but their productivity 
might be indefinitely reduced were all the potential ca- 
pacities of the unskilled laborers to be developed. 

The normal productivity of labor, capital, and land 
must be understood as the productivity of these agents 
when combined in the most advantageous proportions 
that are commonly known. Better combinations are 
always possible, and an individual employer can by his 
own energy create them. From such improvements 
arises the income that Walker understands by profits. 
It is, in his view, the net product of the employer. 1 If 
Walker's analysis is correct : this form of income differs 
widely in nature from those mentioned above. If an 
entrepreneur has made an improvement that can be ap- 
plied by no one but himself, there would appear to be 
good reason for saying that he creates the part of the 
product that exceeds the normal return to labor, capital, 
and land. 

'Walker, The source of business profits, Quarterly Journal of Eco- 
nomics, vol. i, p. 275. 



120 America?i Economic Association. [998 

If the entrepreneurs who have the capacity necessary 
for applying the same method are few, relatively to the 
labor and capital that are capable of being organized by 
them, it would appear to be quite legitimate to say that 
labor and capital are no more productive than before, 
the increased productivity being due to entrepreneurs' 
activity. When, however, so many entrepreneurs are 
able to use the new method that all of the labor and 
capital capable of this form of organization are with- 
drawn from less productive employment, this particular 
form of entrepreneurs' activity manifestly becomes a 
good unlimited relatively to the demand for its services, 
and the productivity formerly attributable to entrepre- 
neurs' activity shifts to labor, capital, and land. The 
entrepreneur may still receive a part of that product, 
but in that case his gains will be a profit of the kind dis- 
cussed in the preceding section. 

Manifestly it would be impossible to draw the line 
between the gain due to a relatively limited form of 
managing ability, the exploitative gain into which it 
may transmute itself, and monopoly profit which ap- 
pears when the possessors of the new method are able to 
prevent its extension. But the first form of gain is dis- 
tinguishable in theory, whether it is properly to be 
classed with profit or not. 1 And it is the relation to rent 
of this concrete form of income which we have now to 
consider. 

The capacity to apply a method is in many respects 
analogous to the three forms of productive agency — labor, 
capital, and land. It yields an income directly imputable 
to it. It is subject to a law of diminishing returns ; for 

1 Personally I would be inclined to treat it as a special form of 
wages. It is manifestly created, not by the method, — methods are 
capable of indefinite reduplication, and are therefore not economic 
goods, — but by the limited personal activities which apply it. 



999] Rent, Profit, and Monopoly Return. 12 1 

however great the capacity of an entrepreneur, it would 
not be humanly possible for him to organize labor and 
capital indefinitely. To do so he must depute his 
method to others, i. <?., develop like capacities in his 
subordinates ; and when he does this his special form of 
activity starts on the road toward becoming a free good. 
The analogy with those forms of productive agency 
termed monopoly goods in a former chapter is still 
closer. The income is price-determined, since the 
method can not ordinarily be shifted from industry 
to industry in consequence of changes in price. It 
is estimated residually, since experimental variation 
in quantity is unthinkable. But it is extremely volatile, 
since nothing more easily becomes relatively unlimited 
than the capacity to apply a combination once invented. 

Entrepreneurs' activity, in Walker's sense of the term, 
is the inventing of new combinations in continual suc- 
cession — the permanent possession of one or another 
capacity for combination in its relatively limited stage. 
This originating capacity is manifestly valued as the 
elements that compose it ; the series of capacities for 
applying new methods is valued from the productivity 
of each one while limited. The general capacity, how- 
ever, may have an influence in determining price, since 
an entrepreneur possessing it may operate in different 
employments, increasing supply where prices are rela- 
tively high, reducing supply where price is low. 

If this element in profits has been correctly analyzed, 
it is the antithesis of rent, not a "species of the same 
genus." We have seen that it is inadmissible to confuse 
rent with either of the other elements in profits. Rent 
is wholly distinct from monopoly gain ; it is no less 
distinct from each part and therefore from the whole of 
the composite income which is termed profits. 



CHAPTER VII. 

CONCLUSION. 

Sec. 45. An elaborate conclusion would be wholly- 
superfluous in an essay of such modest proportions as this 
one. Moreover, a position has already been taken upon 
each controverted point ; and if the argument was not 
sufficient to sustain the position taken, it would be late 
to supply the deficiency here. However, a restatement 
of the writer's view-point and a reiteration of a few of 
the more important points discussed may not be out of 
place. 

The assumptions upon which the argument is based 
are two. In the first place it is assumed that the distri- 
bution of income is the problem of central importance in 
economics, and that therefore economic phenomena 
should be grouped and classified with a view to clearing 
up the problems of distribution. In the second place it 
is assumed that competition exists as a powerful factor 
in economic life, and although it is affected in its 
working by numerous social forces, it holds the position 
of the most essential economic principle. 

This latter assumption will not pass unchallenged in 
an age when so many thinkers are impressed by eco- 
nomic developments which seem to be the forerunners 
of a new monopolistic order of society. It is, however, 
at least plausible that competition is not less active than 
it was during the early prime of the factory system, 
although its form has changed. Competition is less keen 
among industrial establishments which create one and 
the same kind of commodity ; but it is far keener than 
formerly between industrial groups which create, not 



j oo i ] Co nclusion . i 2 3 

like commodities, but commodities yielding like 
amounts of satisfaction, from which the consumer selects 
according to his estimates of utility and cost. It is a 
noteworthy fact that Professor Patten, who has done 
more than any other living theoretical writer to con- 
vince economists of the wide prevalence of monopoly, 
stands also as the foremost exponent of the " law of sub- 
stitution " — competitive law under a new form. The 
persistence of competition, therefore, is at least a de- 
fensible assumption. 

Under competitive law there is a tendency for income 
to identify itself with product. Granting that competi- 
tion exists among entrepreneurs, it is easy to understand 
why a unit of productive agency, offering in the market 
a distinguishable product, should receive that product 
as its reward. On the further assumption that there is 
competition among units of industrial agency for the 
most favored positions in production, it is obvious that 
the productivity of like units will tend toward equality. 
The laws of productivity ultimately govern income; 
and the fundamental classification of incomes, in a com- 
petitive society, is the one which is based upon produc- 
tivity relations. 

It is from this point of view that we have classified 
incomes as productive and exploitative. The former 
incomes represent wealth which is obtained by the 
owners of the agents which produce it ; the latter in- 
comes represent an element secured by other parties in 
distribution. The return to a unit of agency is pro- 
ductive if the loss occasioned by its withdrawal is not 
less than that return ; if the loss occasioned by with- 
drawal is greater, an exploitative income, secured by 
some other party, is implied. 

Exploitative incomes depend upon friction, and fre- 



124 American Economic Association. [1002 

quently exist by virtue of different degrees of resistance 
to economic laws in different social media. If, for ex- 
ample, competition among workers is active while en- 
trepreneurs do not compete, the latter are in a position 
to take advantage of any abnormal productivity of labor. 
If competition of entrepreneurs is checked, and labor is 
immobile, it is possible that a portion of normal product 
may be secured by the entrepreneur. Incomes of this 
kind vary so greatly in permanence and in the laws of 
their development that they hardly permit of scientific 
classification. The same thing is true of the element 
in income due to abnormal productivity which favored 
industrial units may secure. According as exploitative 
and abnormal incomes are more or less permanent, they 
are usually classed as monopoly return or profit. It is 
doubtful whether a wholly satisfactory analysis of these 
forms of income is possible in the present state of 
economic knowledge. 

The case is very different with normal productive in- 
comes. A general law of diminishing returns renders 
possible a scientific explanation of their nature and a 
description of the laws of their development. Certain 
dynamic influences affect a wide range of sources of 
income ; and in order to attain to a view of distribution, 
static and dynamic, it is necessary to group together 
those incomes which are affected alike by familiar 
changes, and to contrast those which undergo effects 
unlike in nature or degree. The dynamic movement 
which is most fully understood is increase in the pro- 
ductive factors themselves, and it is with this fact in 
view that we have grouped incomes as they are affected 
by increase in the factors. 

Sec. 46. Land, it is here maintained, is productive in 
the same sense that labor and capital are productive. 



1003] Conclusion. i 2 5 

The only test by which the productivity of the latter 
agents can be determined, the withdrawal or addition of 
increments, may equally well be applied to land. The 
productivity of land, in the economic sense, is dependent 
upon the fact that land yields diminishing returns to 
successive units of capital and labor applied to it ; and 
in the same way capital is productive, economically, 
because it yields diminishing returns to successive units 
of labor and land combined with it in production. The 
two cases are exactly parallel. What is true of capital 
is also true of labor, and for this reason a sharp distinc- 
tion has been drawn between rent, wages, and interest 
on the one hand, and profit and monopoly return on the 
other. 

Land and capital are therefore alike in this respect ; 
are they, however, identical in nature? It has been ad- 
mitted that land is capable of increase, and the claim 
has been advanced that the holding of land involves 
" abstinence " precisely analogous to the " abstinence " 
involved in holding permanent capital. It has further 
been claimed that the annexation of new land — by which 
is meant not only the reclamation of desert and swamp 
and forest, but also changes in the effective position of 
land, due to improved transportation, and changes in 
the productivity of land which are due, not to additional 
application of labor and capital, but to new methods — 
involves abstinence akin to that which is undergone by 
the man who creates new capital. But the motives 
which lead to the creation of new capital are not 
necessarily active in the annexation of new land ; the 
steady frugality which creates a fund of capital is un- 
like the resolution to join in the search for new homes 
which is one of the most prominent motives leading to 
the creation of new economic land. The two sets of 



126 American Economic Association. [1004 

motives are not so closely connected as normally to act 
simultaneously ; and therefore, while capital may be in- 
creased in quantity and diminished in productivity, it 
is not unlikely that economic land will remain relatively 
stationary in amount and increase in productivity. If 
land and capital alike remain stationary while labor in- 
creases, the effect of the change would no doubt be 
shared by both alike ; and in a society, real or assumed, 
in which this is the case we should make no distinction 
between capital and land. 

It is quite possible that a time may come when the 
land at the disposal of society will not be capable of in- 
crease, using the term " increase " in the broad sense in- 
dicated above. The ultimate limit to increase will, 
however, be psychical, just as the ultimate limit to in- 
crease in capital is psychical, not physical. If that 
state were already attained, however, it would not alter 
the problem. The fact of different rates of increase is 
sufficient in itself to justify difference in classification, 
since there are important dynamic phenomena which 
cannot be explained without such difference in treat- 
ment. 

SEC. 47. Whether rent in itself bears any character- 
istics that will distinguish it from wages and interest is 
a question which requires little further discussion. It 
is a differential income, but in the same sense wages and 
interest are differentials. It may be computed residually ; 
but this is merely a matter of convenience in theory, 
except in the case of land which is not capable of alter- 
native uses, and which is not related through margins to 
other land capable of such uses. There is, however, 
labor and capital in like position. Residual wages and 
interest are no more anomalous than residual rent. 
There may be good reason for making a distinction 



1005] Conclusion. 127 

between the productive incomes of mobile and immobile 
agents, but that distinction would not mark off wages 
and interest from rent. Here again there are conceiva- 
ble historical conditions which would make rent the 
type of residual income, but it would be difficult to point 
out a time when they were actually realized. 

Relation to price has been selected by a great number 
of economists as the test according to which incomes 
are to be classified. " Price-determining " and " price-de- 
termined " appear to be characteristics of income which 
are sharply distinct, and they are characteristics that 
are certainly of cardinal importance in distribution. 
Incomes in one aspect are shares in price, and are price- 
determined ; in another aspect they are portions of 
supply, and are therefore price-determining. In a state 
of imperfect competition, however, there may be in- 
comes which are price-determining in the sense that if 
they are not paid the agent which claims them will 
withdraw from further production. Price must there- 
fore be sufficient to cover them. Other incomes may or 
may not be paid, the agent having no motive to with- 
draw. 

It is obvious that the prevailing motive leading to the 
withdrawal of a laborer from one industry is the desire 
to use his powers in another and better paid industry. 
If prices fall so that normal wages can not be paid, 
supply soon decreases through the migration of labor. 
Similarly if capital does not receive a normal reward, it 
withdraws from the unsatisfactory employment. Mo- 
bility is the essential feature in price relations. Now it 
has been pointed out that land is no less mobile than 
capital and labor, and therefore rent is an income which 
determines price. It is admitted that many concrete 
portions of land have no alternative use, and that in a 



128 American Economic Association. [1006 

qualified sense the return to such land is price-deter- 
mined. But nothing could be more false than that all 
units of labor or of capital are mobile. A certain num- 
ber of units of each agent hold a strategic position, being 
able to shift from industry to industry ; and it is through 
the action of these that the incomes to the respective 
factors control price. 

Historical conditions determine whether or not rent 
"enters into price." When the land of a country is 
almost entirely engaged in producing a single crop, a 
fall in price can throw land out of cultivation only by 
cutting down the return to labor and capital and forcing 
those agents from the laud. This, it may be said, is to 
yield the essential point at issue, for it appears to be an 
admission that rent does not enter into the price of agri- 
cultural produce in its entirety. The small amount of 
agricultural land which will be turned into building 
sites could not materially check a fall in price. It may 
be worth while to point out that in like manner wages 
and interest would not be elements controlling the price 
of manufactured products in their entirety. A fall 
in general prices of manufactures could force into agri- 
culture only a small margin of undifferentiated manu- 
facturing labor and capital. The fallacy of the position 
lies in the grouping together of phenomena when it is 
their interrelations that are to be explained. The real 
price of wheat signifies its relation to beef and wool and 
corn and vegetables as well as to boots and iron ; and 
all of these various relations must be taken into account 
if we would explain the laws which govern the rent of 
wheat land. Taking into account these relations, we 
can but conclude that in its relation to price rent does 
not differ from other productive incomes. The laws of 
dynamic change, then, alone furnish a basis for giving 
to fen t the position of an independent form of income. 



The Citizens' Library 

OF 

ECONOMICS, POLITICS, AND SOCIOLOGY 

Each, $1.25 net; postage 10 cts. 



IRRIGATION INSTITUTIONS 

A Discussion oe the Economic and Legal 
Questions Created by the Growth of Irri- 
gated Agriculture in the West 
By EI/WOOD MEAD, Department of Agriculture. 

AMERICAN MUNICIPAL PROGRESS 

By CHARLES ZUEBIJN, B.D., Associate Professor of Sociology, 
University of Chicago. 

COLONIAL GOVERNMENT 

By PAUD S. REINSCH, Ph.D., EL/.B., Professor of Political Science 
in the University of Wisconsin, Author of "World Politics." 

DEMOCRACY AND SOCIAL ETHICS 

By JANE AD DAMS, Head of " Hull House," Chicago. 

MUNICIPAL ENGINEERING AND SANITATION 

By M. N. BAKER, Ph.B., Associate Editor of Engineering News ; 
Editor of A Manual of American Water Works. 



Send for a circular of earlier issues, including : 



Monopolies and Trusts 

By RICHARD T. ELY. 

Social Control 

By EDWARD A, ROSS. 

Outlines of Economics 

By RICHARD T. ELY. 

The Economics of Distribution 

By JOHN A. HOBSON. 

Government in Switzerland 

By JOHN MARTIN VINCENT. 



World Politics 

By PAUL S. REINSCH. 

Economic Crises 

By EDWARD D. JONES. 

History of Political Parties 

in the United States 

By JESSE MACY, 

Essays in the Monetary History 
of the United States. 

By CHARLES J. BULLOCK. 



PUBLISHED BY 

The MACMILLAN COMPANY, New York 



Timely Books on Public Problems 



A readable account from study on the spot 

of such problems as are raised by the 

strikes in the anthracite coal region . . . . 

Just Ready. 

JOHN GRAHAM BROOKS in 

THE SOCIAL UNREST 

Writes from close observation of live questions such as 
OF SOCIAL trades unions, strikes, the introduction of machinery, etc., 
PRACTICE and on all topics speaks straight from his convictions as to 

vital social questions. 

Cloth, i2mo. $1.50 net. {Postage /j els.) 



W. J. GHENT in 

OUR BENEVOLENT FEUDALISM 

PROBLEMS Gives a careful analysis of present industrial and social 
FUTURE tendencies, and a forecast of the coming state of society. 

Cloth, i2tno. $1.25 net. 



JOHN BATES CLARK, 

Columbia University , in 

THE CONTROL OF TRUSTS 

PROBLEMS Argues in favor of curbing the power of monopoly by a 
OF THE national method. 

TR U S TS 

Cloth, i2tno. 60cts.net. (Postage 5 els.) 



By GEORGE h. BOLEN 

THE PLAIN FACTS AS TO THE 

TRUSTS AND THE TARIFF 

With Chapters on the Railroad 
Problem and Municipal Monopolies 

PROBLEMS "The treatment is so direct there can be no misunder- 
OF THE standing it. The book deserves careful campaign study." 

TRUSTS —Philadelphia Public Ledger. 

Cloth, i2mo. $1.50 net. (Postage 11 cts.) 



MICHAEL A. LANE in 

THE LEVEL OF SOCIAL MOTION 

An Inquiry into the Future 
Conditions of Human Society 

PROBLEMS Aims to develop a law of social motion, foreshadowing the 
OF social future of human society in its moral, intellectual, and 
theory economic forms. 

Cloth, i2tno. $2.00 net. {Postage 14 cts.) 



PAUL S. REINSCH, 

University of Wisconsin, in 

COLONIAL GOVERNMENT 

PROBLEMS Treats of motives and methods of colonization, forms of 
OF THE colonial government, institutions of colonial eovern- 

COLONIES ment) etc. 

In the Citizen's Library. Half leather, $1.25 net. {Postage 10 cts.) 



Miss JANE) ADDAMS in 

DEMOCRACY AND SOCIAL ETHICS 

PROBLEMS Deals with charitable effort, filial relations, household ad- 

OF PHIL- justments, industrial amelioration, educational methods, 

ANTHROP- and political reform, " with a fullness of knowledge and a 

IC WORK breadth of sympathy that are remarkable." — Churchman. 

In the Citizen's Library. Half leather, $1.25 net. {Postage 12 cts.) 



CHARLES ZUEBLIN, 

Chicago University, in 

AMERICAN MUNICIPAL PROGRESS 

CHAPTERS IN MUNICIPAL SOCIOLOGY 

Takes up the problems of the so-called public utilities : 
transportation, street paving or cleaning, sanitation, pub- 
PR OJ?LEMS ii c buildings, public schools, libraries, children's play- 
CITIES. grounds, public baths, public gymnasiums, parks and boul- 

evards, and the questions of public control, ownership, 
operation, etc. 
In the Citizen's Library. Half leather, $1.25. net. {Postage 9 cts.) 



THE MACMILLAN COMPANY, 

Publishers, 66 Fifth Avenue, New York 



New Works on Political History 

M. OSTROGORSKI'S 

DEMOCRACY AND THE ORGANIZATION OF POLITICAL 

PARTIES. 

The author's long-promised work on the Motive Forces of Democracy, 
translated from the French by Frederick Clarke, formerly Taylo- 
rian Scholar in the University of Oxford. With an Introduction by 
the Rt. Hon. James Bryce, M. P., author of "The American Com- 
monwealth," etc, Two vols. Cloth, 8vo. $6.00 net. 
A systematic history of party organization in England and the United 
States of great dramatic interest. 

A HISTORY OF POLITICAL THEORIES, 

Ancient and Mediaeval. 

By WILLIAM A. DUNNING, Professor of History in Columbia University, 
Author of " Essays on the Civil War and Reconstruction," etc. 

Cloth, 8vo. $2.50 net. {Postage 18 ds.) 
"Prof. Dunning's volume is as timely as it is unique, and doubly 
timely because it is unique. . . . admirable in interesting suggestive- 
ness and in clearness of insight. It deserves a place by the side of 
Lecky's History of European Morals." — CotnmH Advertiser. 

THE STORY OF THE MORMONS 

From the Date of their Origin to the Year 1901. 

By WILLIAM ALEXANDER LINN, sometime Managing Editor of the 
New York Evening Post. Cloth, 8vo. $4.00 net. ( Postage 21 ds. ) 
" In summing up our opinion of this book we can unhesitatingly say 
that it stands to-day as the one comprehensive history of the Mormons 
which can be accepted as unbiased and accurate." — Baltimore Sun. 
" Mr. Linn's history is likely to be the standard for years to come.' c 

— The New York Sun. 

THE LOYALISTS IN THE AMERICAN REVOLUTION: 

A History of the Political and Social Struggle between the 
American Whigs and Tories. 

By CLAUDE HALSTEAD VAN TYNE, Ph.D., Senior Fellow in Ameri- 
can History, University of Pennsylvania. Cloth, i2tno. $2.00 net. 
"There have been numerous books dealing with the loyalists of dif- 
ferent States, but Mr. Van Tyne's is the first to give a calm and dis- 
passionate sketch of the general treatment of the loyalists and of the 
conditions of life during the American Revolution. — Phila. Ledger. 



Books published at NET prices are sold by booksellers everywhere at the 
advertised NE T prices. 

When delivered from the publishers, carriage, either postage or express- 
age, is an extra charge. 



THE MACMILLAN COMPANY, 

66 FIFTH AVENUE, NEW YORK 



The Quarterly Journal of Economics 

Established in 1886 by Harvard University 



Books, Periodicals, and Manuscript to be addressed, ED- 
ITORS of QUARTERLY JOURNAL OF ECONOMICS, 
Cambridge, Mass. 

Business letters, etc., to be addressed, GEORGE H. 
ELLIS, Publisher, 272 Congress St., Boston, Mass. Sub- 
scription $3.00 a year. 



Editor, F. W. TAUSSIG. 
Associate Editors, T. N. CARVER, W. Z. RIPLEY. 



CONTENTS FOR AUGUST, 1902. 

I. The Variation of Productive Forces Charles J. Bullock 

II. The Isthmian Canal Emory R. Johnson 

III. Recent Tendencies in Sociology Edward A. Ross 

IV. The United States Industrial Commission . . . E. Dana Durand 
Notes and Memoranda : 

Recent Events in the New England Cotton Trade . A. T. Lyman 
The American Workmen's Compensation Act . . Geo. E. Barnett 
Recent Publications upon Economics. 



CONTENTS FOR NOVEMBER, 1902. 

I. The Sugar Industry and Legislation in Europe 

Charles S. Griffin 

II. The Sugar Question in the United States . . . Frank R. Rutter 

III. Recent Tendencies in Sociology. II Edward A. Ross 

IV. The Early Transportation and Banking Enterprises of the 
States in Relation to the Growth of Corporations 

G. S. Callender 

V. The "Roundabout Process" in the Interest Theory 

Frank A. Fetter 
Notes and Memoranda : 

The British Trade-union Congress of 1902 . . . E. Dana Durand 
The Place of the Theory of Value in Economics. . T. N. Carver 
Recent Publications upon Economics. 



Giornale Degli Economist! 



Sommario, Dicembre, 1902. 



I. La Situazione del Mercato Monetario. (X.) 

II. Osservazioni su Alcune Teorie di Economia Pura. 
(G. Scorza.) 

III. La Beneficenza Dello Stato. (E. Branzoli-Zappi.) 

IV. Poche Osservazioni Sullo Schema di Capitolato Proposto 

per la Concessioue della Costruzione e dell'esercizio e 
Manutenzione dell' Acquedotto Pugliese. (**) 

V. Rapport an Ministre des Finance par 1/ ad ministration des 
Monnaies et Medailles. (G. B. Salvioni.) 

VI. Cronaca ( La Questioned! Moda). (F. Papafava.) 

VII. Nuove Pnbblicazioni. (Giacomo Novicow, Pierre Des 
Essars, J. E. Cairnes, Ch. Gide, Ch. Gide, C. F. 
Bastable, Yves Guyot, L. Courcelle, Em. Cossa, 
M. Gioia, C. Cattaneo, Giacomo Luzzatti, Alloc- 
chio, Davenport, Camera di Commercio di Paler- 
mo, Testera.) 

VIII. Indice del Volume XXV della Serie II. 



ROMA: 

PRESSO LA DIREZIONE, 
Monte Savello Palazzo Orsini. 



ATTRACTIVE COMBINED OFFERS 



OF THE 



BIBLIOTHECA SACRA 



WITH THE 



Records of the Past and Asiatic Russia, 



ASIATIC RUSSIA. 



"A work of highest authority, presented with literary grace and skill . . . 
The result of prodigious scholarship and wide observation presented in easy, 
readable style. " — The Critic. 

THE RECORDS OF THE PAST. 

A new monthly periodical published at Washington, D. C, under the edi- 
torship of Rev. Henry Mason Baum, D.C.I,., with Mr. Frederick Bennett 
Wright as assistant. Each number contains thirty-two quarto pages, accom- 
panied with numerous elegant illustrations. 



Asiatic Russia $7.95 postpaid. 

Records of the Past 2.00 

Bibliotheca Sacra 3.00 

$12.95 
All three for $10 00. 

Asiatic Russia $7-95 postpaid. 

Bibliotheca Sacra 3.00 

$i°-95 
Both for $g.oo. 

Records of the Past $2.00 

Bibliotheca Sacra . . • '■ 3.00 

$5-00 
Both for $4.00. 



Remittances, strictly in advance, may be made by Money Order, New 
York Draft, or Registered Letter, to 

THE BIBLIOTHECA SACRA CO., 

Oberwn, Ohio, U. S. A. 



Street Railways 



OF 



Chicago 



The Results of an Examination of the Books of Account and 

Corporation Records of the Street Railways of Chicago 

for the Civic Federation. 



The only Study of its kind in existence 



Edited by 
Dr. MILO ROY MALTBIE. 

EDMUND F. BARD, 
Accountant. 



The best expose of American Street Railway Finance now extant. 
— Annals of the American Academy. 



8vo, 1 60 pages. Cloth bound, 50 cents. 



Address— 



Reform Club Committee on City Affairs, 

50-52 Pine Street, 

New York City 



PUBLICATIONS OF THE AflERICAN ECONOfllC ASSOCIATION 



FIRST SERIES 

VOLUME I, 1886 

No. Price in paper. 

i. Report of Organization of the American Economic Association. Pp. 46. $ .50 

2-3. x "Relation of the Modern Municipality to the Gas Supply. By E. J. James. 

Pp. 76. .75 

4. Co-operation in a Western City. By Albert Shaw. Pp. 106. .75 

5. *Co-operation in New England. By Edward W. Bemis. Pp. 136. .75 

6. *Relation of the State to Industrial Action. By Henry C. Adams. Pp. 85. .75 

VOLUME II, 1887 

1. Three Phases of Co-operation in the West. By Amos G. Warner. Pp.119. -75 

2. Historical Sketch of the Finances of Pa. By T. K. Worthington. Pp. 106. .75 

3. The Railway Question. By Edmund J. James. Pp. 68. .75 

4. The Early History of the English Woolen Industry. By W. J. Ashley. Pp. 85. .75 

5. Mediaeval Guilds of England. By Edwin R. A. Seligman. Pp. 113. .75 

6. Relation of Modern Municipalities to Quasi-Public Works. By H. C. Adams and 

others. Pp. 87. ,75 

VOLUME III, 1888 

1. Statistics in Colleges, by C. D. Wright; Sociology and Political Economy, by 

F. H. Giddings ; The Legel- Tender Decisions, by E. J. James. Pp. 80. .75 

2. Capital and its Earnings. By John B. Clark. Pp. 69. .75 

3. The Manual Laboring Class, by F. A. Walker ; Mine Labor in the Hocking Val- 

ley, by E. W. Bemis ; Report of the Second Annual Meeting. Pp. 86. .75 
4-5. ^"Statistics and Economics. By Richmond Mayo-Smith. Pp. 127. 1.00 

6. The Stability of Prices. By Simon N. Patten. Pp. 64. .75 

VOLUME IV, 1889 

1. Contributions to the Wages Question : The Theory of Wages, by Stuart Wood ; 

Possibility of a Scientific Law of Wages, by J. B. Clark. Pp. 69. .75 

2. Socialism in England. By Sidney Webb. Pp. 73. .75 

3. Road Legislation for the American State. By J. W. Jenks. Pp. 83. .75 

4. Third Annual Meeting : Report of the Proceedings. Pp. 123. .75 

5. Malthus and Ricardo, by S. N. Patten ; The Study of Statistics, by D. R. Dewey ; 

Analysis in Political Economy, by W. W. Folwell. Pp. 69. .75 

6. *An Honest Dollar. By E. Benjamin Andrews. Pp. 50. .75 

VOLUME V, 1890 

1. The Industrial Transition in Japan. By Yeij'.ro Ono. Pp. 122. 7.00 

2. Two Essays on Child- Labor. By Willoughby and de Graffenried. Pp. 150. .75 
3-4. Papers on the Canal Question. By E. J. James and L. M. Haupt. Pp.85. 1.00 

5. History of the New York Property Tax. By J. C. Schwab. Pp. 108. 1.00 

6. The Educational Value of Political Economy. By S. N. Patten. Pp. 36. .75 

VOLUME VI, 1891 

1-2. Fourth Annual Meeting : Report, Papers, and Discussions. $1.00 

3. Government Forestry. Papers by Pinchot, Bowers, and Fernow. Pp. 102. .75 
4-5. Municipal Ownership of Gas in the United States. By E. W. Bemis. Pp. 185. 1.00 
6. State Railroad Commissions. By Frederick C. Clark. Pp. no. .75 

VOLUME VII, 1892 

1. The Silver Situation in the United States. By F. W. Taussig. Pp. 118. .75 

2-3. **Shifting and Incidence of Taxation. By E. R. A. Seligman. Pp. 192. 1.00 

4-5. Sinking Funds. By Edward A. Ross. Pp. 106. 1.00 

6- The Reciprocity Treaty with Canada of 1854. By F. E. Haynes. Pp. 70. .75 



MAh 23 1903 

PUBLICATIONS OF THE AMERICAN ECONOHIC ASSOCIATION 



VOLUME VIII, 1893 

No. Price in paper, 

i. Fifth A'nnual Meeting : Report of the Proceedings. Pp. 130. .75 

2-3. Housing of the Poor in American Cities. By M. T. Reynolds. Pp. 132. 1 .00 
4-5. Public Assistance of the Poor in France. By Emily G. Balch. Pp. 180. 1.00 
6. First Stages of the Tariff Policy of the U. S. By William Hill. Pp. 162. 1 .00 

VOLUME IX, 1894 

Sixth Annual Meeting : Hand-Book and Report. Pp. 130. .50 

1-2. Progressive Taxation in Theory and Practice. By Edwin R. A. Seligman. 

Pp. 222. {In cloth $1.50). 1,00 

3. The Theory of Transportation. By Charles H. Cooley. Pp. 148. .75 

4. Sir William Petty. By Wilson Lloyd Bevan. Pp. 102. ,£5 
5-6. Papers on Labor Problems. By J. B. Clark, C. D. Wright, D. R. Dewey, A. 

T. Hadley, and J. G. Brooks. Pp. 94. 1,00 

VOLUME X, 1895 

Seventh Annual Meeting : Hand-Book and Report. Pp. 138. .50 

1-3. The Canadian Banking System, 1817-1890. By R. M. Breckenridge. Pp. 476. 

{In cloth $2.50.) T.50 

4. Poor Laws of Massachusetts and New York. By John Cummings. Pp.136. .75 

5-6. Letters of Ricardo to McCulloch, 1816-1823. Edited by J. H. Hollander. Pp. 

204. {hi cloth $2.00.) 7.25 

VOLUME XI, 1896 

1-3. Race Traits and Tendencies of the American Negro. By F. L. Hoffman. Pp. 

330. {In cloth $2.00.) 1.25 

4. Appreciation and Interest. By Irving Fisher. Pp. no. .75 

General Index to Volumes I-XI (1 886-1896). .25 

(Supplied free to owners of sets upon application to the Secretary. ) 



Any volume in paper, $4.00 ; in cloth, $5.00 for a single volume, $4.00 for each 
additional volume ordered at the same time. Vol. XI, in paper, $2.00 ; in cloth, 
$2.50. 

Set of 11 volumes in cloth, with index, I41.00. 

^Numbers starred are sold only with the set ; but those double starred can be 
obtained in revised edition, issued by the Macmillan Co. 

Note. — During 1 896-1 899 the Association issued its publications in two series, 
viz. : the bi-monthly Economic Studies, and the "new series" of larger mono- 
graphs printed at irregular intervals. In 1900 it reverted to the policy of issuing 
its monographs, now called the " third series " of the publications, at regular quar- 
terly intervals. 

ECONOMIC STUDIES 
VOLUME I, 1896 

No. Price in paper. 

Eighth Annual Meeting : Hand-Book and Report. Pp. 178. .50 

1. The Theory of Economic Progress, by J. B. Clark ; The Relation of Changes in 

the Volume of the Currency to Prosperity, by F. A. Walker. Pp. 46. .50 

2. The Adjustment of Wages to Efficiency. Three papers : Gain Sharing, by H. 

R. Towne ; The Premium Plan, by F. A. Halsey ; A Piece-Rate System, 
by F. W. Taylor. Pp. 83. .50 

3. The Populist Movement. By Frank L. McVey. Pp. 81. .50 

4. The Present Monetary Situation. By W. Lexis. Translated by John Cum- 

mings. Pp. 72. .50 

5-6. The Street Railway Problem in Cleveland. By W. R. Hopkins. Pp. 94. .75 



JBLICATIONS 



AMERICAN ECONOMIC ASSOCIATE 



VOLUME II, 1897 

Ninth Annual Meeting : Hand-Book and Report. Pp. 162. .50 

Economics and Jurisprudence. By Henry C. Adams. Pp. 48. .50 

The Saloon Question in Chicago. By John E. George. Pp. 62. .50 

The General Property Tax in California. By Carl C. Plehn. Pp. 88. .50 

Area and Population of U. S. at Eleventh Census. By W. F. Willcox. Pp. 60. .50 
A Discussion Concerning the Currencies of the British Plantations in America, 

etc. By William Douglass. Edited by C. J. Bullock. Pp. 118. .50 
Density and Distribution of Population in U. S. at Eleventh Census. By W. F. 

Willcox. Pp. 79. .50 

VOLUME III, 1898 

Tenth Annual Meeting : Hand-Book and Report. Pp. 136. '.50 
Government by Injunction. By William H. Dunbar. Pp. 44. .50 
Economic Aspects of Railroad Receiverships. By H. H. Swain. Pp. 118. .50 
The Ohio Tax Inquisitor Law. By T. N. Carver. Pp. 50. .50 
The American Federation of Labor. By Morton A. Aldrich. Pp. 54. .50 
Housing of the Working People in Yonkers. By Ernest L. Bogart. Pp. 82. .50 
The State Purchase of Railways in Switzerland. By Horace Michelie ; trans- 
lated by John Cummings. Pp. 72. .50 

VOLUME IV, 1899 

Eleventh Annual Meeting : Hand-Book and Report. Pp. 126. .50 

I. Economics and Politics. By A. T. Hadley. II. Report on Currency Reform. 

III. Report on the Twelfth Census. Pp. 70. .50 

Personal Competition. By Charles H. Cooley. Pp. 104. .30 

Economics as a School Study. By Frederick R. Clow. Pp. 72. .50 

5. The English Income Tax. By J. A. Hill. Pp.162. 1.00 

and last).* The Effects of Recent Changes in Monetary Standards upon the 

Distribution of Wealth. By Francis S. Kinder. Pp. 91. .50 

Price of the Economic Studies $2.50 per volume in paper, $3.00 in cloth. The 
: of four volumes, in cloth, $10.00. 

NEW SERIES 

The Cotton Industry. By M. B. Hammond. Pp.494, {hi cloth $2.00.) $1.50 
Scope and Method of the Twelfth Census. Critical discussion by over twenty 
statistical experts. Pp. 525. {In cloth $2.50.) 2.00 

Both volumes, in cloth, $<f..oo. 

THIRD SERIES 
VOLUME I, 1900 

Twelfth Annual Meeting : Papers on Trusts (3) ; Railroad problems (3) ; Eco- 
nomic theory (3) ; Public finance (2) ; Consumers' league ; Twelfth 
census. Pp. 286. 7.00 

The End of Villainage in England. By T. W. Page. Pp. 99. 1.00 

Essays in Colonial Finance. By members of the Association. Pp. 303 1.50 
Currency and Banking in the Province of the Massachusetts Bay. By A. McF. 
Davis. Part I : Currency. Pp. 484 -+- 19 photogravure plates. 
{In cloth $2.00.) 1.75 

VOLUME II, 1901 

Thirteenth Annual Meeting : Papers on Commercial education (3) ; Economic 

theory (3) ; Taxation of" quasi public corporations (2) ; Porto Rican 

finance ; Municipal accounts. Pp. 300. 1.25 

Currency and Banking. By A. McF. Davis. Part II : Banking. 

Pp. 341 -f- 18 photogravure plates. {In cloth $2.00. ) 1.75 

Theory of Value before Adam Smith. By Hannah R. Sewall. Pp. 132. 1.00 

Administration of City Finances in U. S. By Frederick R. Clow. Pp. 144. 1.00 





PUBLICATIONS OF THE AflERICAN ECONOMIC ASSOCIATION 



VOLUME III, 1902 

1. Fourteenth Annual Meeting: Papers on International trade (3) ; Industrial 

policy (2) ; Public finance (2) ; Negro problem ; Arbitration of labor 
disputes ; Economic history. Pp. 400. 

2. The Negro in Africa and America. By Joseph A. Tillinghast. Pp. 

(In cloth, $1.50.) 

3. Taxation in New Hampshire. By Maurice H. Robinson. Pp. 232. 

4. Rent in Modern Economic Theory. By Alvin S. Johnson. Pp. 136. 

VOLUME IV, 1903. 



1.50 
240. 
J -25 

■75 



Fifteenth Annual Meeting : Papers on Trades Unions (4) ; Railway Regulation 
(2); Theory of Wages ; Theory of Rent ; Oriental Currency Problem ; 
Economics and Social Progress. {In Press). 



The entire Publications, 1886-1902, viz., first series, new series, Economic Studies, 
and third series, vols. 1-3, twenty volumes, in cloth, $62.00. Special price to libra- 
ries on application. The supply of complete sets is now below fifty. 

The price of the Third Series by volumes is the same as that of the first series ; 
see above. 

Cloth bound volumes will be sent, prepaid, to members, for 75 cents each, in ex- 
change for unbound numbers, returned to the Secretary prepaid, and in good con- 
dition. Copies in half morocco are 50 cents per volume more than those in cloth. 

Separate subscriptions by non-members, libraries, etc., $4.00 per year. Any 
single monograph may be obtained at the price given above. One-sixth dis- 
count to members and subscribers on all orders. 



The American Economic Association, founded, among other purposes, 
for " the encouragement of economic research," and " the encourage- 
ment of perfect freedom of economic discussion," has over a thousand 
members, including public and professional men and most of the lead- 
ing students of political economy in America. Membership dues are 
three dollars a year. Each member receives all current reports and 
publications of the Association. 



Address applications for membership, sub- 
scriptions, and inquiries to the 

SECRE TARYof the AMERICAN 
ECONOMIC ASSOCIATION, 

Ithaca, N. Y. 



Address all orders except subscriptions 
to the publishers, 

THE MACMILLAN CO., 

66 Fifth Avenue, - - New York. 









°o • 




•1 o 
















C, vT 




* ^ °^ •••■ 







.<V . " • o^ ^ 



.■"•*. O 

























v* .. "2* 



,* . . . 
















'^0 














fr * «? s>\ o 1 ! 



<^ *-TT 



r oY 




^0" 












sO^" 



3^ f 



;• .^ ^ -y^^/ . ^* ^ 







V^' 











• 4\ V< ^ ^ 




r . • . 





%/ .-ate-. \/ .•• 





feW^ N. MANCHESTER, 
Vsas ^ INDIANA 4fiQfi? 




